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FILED: NEW YORK COUNTY CLERK 12/29/2011 04/25/2012

NYSCEF DOC. NO. 1 8-1

INDEX NO. 653665/2011 RECEIVED NYSCEF: 12/29/2011 04/25/2012

SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY STICHTING PENSIOENFONDS ABP, Plaintiff, v. CREDIT SUISSE GROUP AG; CREDIT SUISSE AG; CREDIT SUISSE (USA), INC.; CREDIT SUISSE HOLDINGS USA, INC.; ASSET BACKED SECURITIES CORP.; CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.; CREDIT SUISSE SECURITIES (USA) LLC; DLJ MORTGAGE CAPITAL, INC.; CREDIT SUISSE FINANCIAL CORP.; SELECT PORTFOLIO SERVICING, INC.; JEFFREY A. ALTABEF; JOSEPH M. DONOVAN; EVELYN ECHEVARRIA; JULIANA JOHNSON; BRUCE KAISERMAN; ANDREW A. KIMURA; MICHAEL A. MARRIOTT; CARLOS ONIS; GREG RICHTER; and THOMAS ZINGALLI Defendants. Index No. Date Index No. Purchased: December 29, 2011

SUMMONS The basis of the venue is each of the defendants either resides in New York or conducts continuous and systematic business in New York. (CPLR 301 & 302)

TO THE ABOVE-NAMED DEFENDANTS Credit Suisse Group AG Uetlibergstrasse 231, P.O. Box 900 Zurich Switzerland CH 8070 Credit Suisse (USA) Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010 Asset Backed Securities Corp. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010 Credit Suisse AG Paradeplatz 8, P.O. Box 1 Zurich, Switzerland CH 8070 Credit Suisse Holdings USA, Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010 Credit Suisse First Boston Mortgage Securities Corp. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010

Credit Suisse Securities (USA) LLC Attn: Litigation Department Eleven Madison Avenue New York, New York 10010 DLJ Mortgage Capital, Inc. Attn: Litigation Department Eleven Madison Avenue New York, New York 10010 Jeffrey A. Altabef 148 Hardscrabble Lake Drive Chappaqua, New York 10514 Evelyn Echevarria 9549 Greyson Heights Drive Charlotte, NC 28277 Bruce Kaiserman 92 2nd Street Garden City, New York 11530 Michael A. Marriott 325 West End Ave, Apt 6A New York, New York 10023 Greg Richter 18 Gladwin Place Bronxville, NY 10708

Credit Suisse Financial Corp. 302 Carnegie Center, 2nd Floor, Princeton, New Jersey 08540 Select Portfolio Servicing Inc. 3815 South West Temple, Salt Lake City, Utah 84115 Joseph M. Donovan 19 Frog Rock Road Armonk, New York 10504 Juliana Johnson 5540 Fallon Court Charlotte, NC 28226 Andrew A. Kimura 104 Fargo Lane Irvington, New York 10533 Carlos Onis

Thomas Zingalli

You are hereby summoned to answer the Complaint in this action and to serve a copy of your answer, or, if the Complaint is not served with this summons, to serve a notice of appearance, on the Plaintiffs attorney within twenty (20) days after the service of this summons, exclusive of the date of service (or within thirty (30) days after service is complete if this summons is not personally delivered to you within the State of New York); and in case of your failure to appear or answer, judgment will be taken against you by default for the relief demanded in the Complaint.

SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY

STICHTING PENSIOENFONDS ABP, Plaintiff, v. CREDIT SUISSE GROUP AG; CREDIT SUISSE AG; CREDIT SUISSE (USA), INC.; CREDIT SUISSE HOLDINGS USA, INC.; ASSET BACKED SECURITIES CORP.; CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.; CREDIT SUISSE SECURITIES (USA) LLC; DLJ MORTGAGE CAPITAL, INC.; CREDIT SUISSE FINANCIAL CORP.; SELECT PORTFOLIO SERVICING, INC.; JEFFREY A. ALTABEF; JOSEPH M. DONOVAN; EVELYN ECHEVARRIA; JULIANA JOHNSON; BRUCE KAISERMAN; ANDREW A. KIMURA; MICHAEL A. MARRIOTT; CARLOS ONIS; GREG RICHTER; and THOMAS ZINGALLI Defendants.

Index No.

COMPLAINT

JURY TRIAL DEMANDED

GRANT & EISENHOFER P.A. 485 Lexington Avenue, 29th Floor New York, New York 10017 Jay W. Eisenhofer, Esq. Geoffrey C. Jarvis, Esq. Deborah A. Elman, Esq. Robert D. Gerson, Esq. Telephone: (646) 722-8500 Facsimile: (646) 722-8501

TABLE OF CONTENTS INTRODUCTION .......................................................................................................................... 1 NATURE OF ACTION .................................................................................................................. 2 JURISDICTION AND VENUE ..................................................................................................... 6 PARTIES ........................................................................................................................................ 6 A. B. C. PLAINTIFF ................................................................................................................ 6 DEFENDANTS ........................................................................................................... 7 RELEVANT NON-PARTIES ...................................................................................... 13

SUBSTANTIVE ALLEGATIONS .............................................................................................. 14 I. II. III. IV. THE SECURITIZATION PROCESS GENERALLY...................................................... 14 THE SECURITIZATIONS ASSOCIATED WITH THE PLAINTIFFS CERTIFICATES AND ITS INVESTMENTS IN THE CERTIFICATES....................... 17 IMPORTANT FACTORS IN THE DECISION OF INVESTORS SUCH AS PLAINTIFF TO INVEST IN THE CERTIFICATES ...................................................... 21 DEFENDANTS KNOWINGLY MISREPRESENTED THE QUALITY OF THE SECURITIES THEY ORIGINATED OR ACQUIRED AND PACKAGED FOR SALE TO INVESTORS SUCH AS ABP......................................................................... 25 A. CREDIT SUISSE DISREGARDED UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS IN ITS OWN VERTICALLY INTEGRATED MORTGAGE LENDING OPERATIONS ........................................................................................... 29 1. 2. 3. B. DLJ Mortgage Capital, Inc. ...................................................................... 30 Credit Suisse Financial Corp. ................................................................... 33 Lime Financial Services Ltd. .................................................................... 33

CREDIT SUISSE WAS AWARE THAT THIRD-PARTY ORIGINATORS WERE ABANDONING THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS ........................................................................................................... 35 1. 2. Credit Suisse Ignored Evidence of Underwriting Failures From Its Due Diligence Vendor .............................................................................. 35 Credit Suisse Knew Of Underwriting Failures Through Its Repricing Activities............................................................................... 38 i

3. C. D.

Credit Suisse Knew Of Underwriting Failures Through Its Servicing Activities................................................................................... 41

CREDIT SUISSE KNEW OF DECLINING UNDERWRITING STANDARDS THROUGH ITS MONITORING OF THE HOUSING MARKET ....................................... 43 DEFENDANTS CREDIT SUISSE GROUP, CREDIT SUISSE USA AND CREDIT SUISSE HOLDINGS CONTROLLED THE CREDIT SUISSE SECURITIZATION PROCESS ................................................................................................................ 47

V.

A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS UNDERLYING PLAINTIFFS CERTIFICATES WERE MADE AS A RESULT OF THE SYSTEMATIC ABANDONMENT OF PRUDENT UNDERWRITING GUIDELINES AND STANDARDS ................................................................................ 50 A. B. DEFENDANTS CSFC AND DLJ ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS ............................................................ 51 THE THIRD-PARTY ORIGINATORS OF THE MORTGAGE LOANS UNDERLYING PLAINTIFFS CERTIFICATES ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS ............................................................ 52 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Accredited Home Lenders Inc. ................................................................. 54 Aegis Mortgage Corporation .................................................................... 55 Ameriquest Mortgage Company............................................................... 56 Argent Mortgage Company, LLC............................................................. 59 Decision One Mortgage Company, LLC .................................................. 61 Encore Credit Corp. .................................................................................. 63 EquiFirst Corporation ............................................................................... 64 Finance America, LLC.............................................................................. 66 Nationstar Mortgage LLC......................................................................... 67 OwnIt Mortgage Solutions, Inc................................................................. 69 Residential Funding Company, LLC ........................................................ 72

VI.

A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS WERE MADE TO BORROWERS WHO DID NOT OCCUPY THE PROPERTIES IN QUESTION ......... 74

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VII.

DEFENDANTS MISREPRESENTED THE LTV RATIOS OF THE MORTGAGE LOANS AND THE NUMBER OF PROPERTIES WORTH LESS THAN THE OUTSTANDING LOANS........................................................................... 77 THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE CERTIFICATES............................................................................................................... 83 DEFENDANTS MISREPRESENTED THE EXTENT OF CREDIT ENHANCEMENT INCLUDED IN THE CERTIFICATES............................................ 88 DEFENDANTS FAILED TO ENSURE THAT TITLE TO THE UNDERLYING MORTGAGE LOANS WAS EFFECTIVELY TRANSFERRED................................... 90 DEFENDANTS SPECIFIC MATERIAL MISSTATEMENTS AND OMISSIONS IN THE OFFERING DOCUMENTS......................................................... 93 A. B. C. D. E. F. G. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING STANDARDS AND PRACTICES ...................................................... 97 DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING EXCEPTIONS ................................................................................. 99 DEFENDANTS MADE UNTRUE STATEMENTS AND OMISSIONS REGARDING LOAN-TO-VALUE RATIOS AND APPRAISALS ....................................................... 101 DEFENDANTS MATERIALLY MISREPRESENTED THE ACCURACY OF THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES ............................................ 104 DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE CREDIT ENHANCEMENTS APPLICABLE TO THE CERTIFICATES ......................................... 105 DEFENDANTS MADE UNTRUE STATEMENTS REGARDING OWNEROCCUPANCY STATISTICS...................................................................................... 108 DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE TRANSFER OF TITLE TO THE ISSUING TRUSTS............................................................................ 110

VIII.

IX. X. XI.

XII. XIII.

DEFENDANTS KNEW THAT THE OFFERING DOCUMENTS CONTAINED MATERIAL MISSTATEMENTS AND OMISSIONS.................................................. 112 PLAINTIFF JUSTIFIABLY RELIED ON DEFENDANTS MISREPRESENTATIONS TO ITS DETERIMENT .................................................... 113

XIV. PLAINTIFF HAS SUFFERED LOSSES AS A RESULT OF ITS PURCHASES OF THE CERTIFICATES.............................................................................................. 115 CAUSES OF ACTION ............................................................................................................... 120

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FIRST CAUSE OF ACTION Common Law Fraud (Against the Corporate Defendants)......... 120 SECOND CAUSE OF ACTION Fraudulent Inducement (Against the Corporate Defendants) ..................................................................................................................... 122 THIRD CAUSE OF ACTION Aiding and Abetting Fraud (Against All Defendants) .............. 123 FOURTH CAUSE OF ACTION Negligent Misrepresentation (Against All Defendants) ........ 125 PRAYER FOR RELIEF ............................................................................................................. 126 JURY DEMAND ........................................................................................................................ 127

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INTRODUCTION Plaintiff Stichting Pensioenfonds ABP (ABP or Plaintiff), by its attorneys, Grant & Eisenhofer P.A., brings this action pursuant to the common law. This action is brought against Defendants Credit Suisse Group AG (Credit Suisse Group); Credit Suisse AG (CSAG); Credit Suisse (USA), Inc. (Credit Suisse USA); Credit Suisse Holdings USA, Inc. (Credit Suisse Holdings); Asset Backed Securities Corp. (ABS); Credit Suisse First Boston Mortgage Securities Corp. (CSFB Mortgage); Credit Suisse Securities (USA) LLC (Credit Suisse Securities); DLJ Mortgage Capital, Inc. (DLJ); Credit Suisse Financial Corp. (CSFC); Select Portfolio Servicing, Inc. (SPS, and collectively, Credit Suisse or the Credit Suisse Defendants); Jeffrey A. Altabef; Joseph M. Donovan; Evelyn Echevarria; Juliana Johnson; Bruce Kaiserman; Andrew A. Kimura; Michael A. Marriott; Carlos Onis; Greg Richter; and Thomas Zingalli (collectively, the Defendants). Plaintiff makes the allegations in this Complaint based upon personal knowledge as to matters concerning Plaintiff and its own acts, and upon information and belief as to all other matters. This information is derived from the investigation by Plaintiffs counsel, which has included a review and analysis of annual reports and publicly filed documents, reports of governmental investigations by the United States Securities and Exchange Commission (the SEC), the Financial Crisis Inquiry Commission (the FCIC), the United States Department of Justice (the DOJ), the United States Senate Permanent Subcommittee on Investigations (the PSI), and numerous investigations by other federal and state governmental units, as well as press releases, news articles, analysts statements, conference call transcripts and presentations, and transcripts from speeches and remarks given by Defendants. In addition, Plaintiffs counsel conferred with counsel for other plaintiffs who have filed other complaints against these Defendants based on the same or similar activities. Based on the foregoing, Plaintiff believes

that substantial additional evidentiary support exists for the allegations herein, which Plaintiff will find after a reasonable opportunity for discovery. NATURE OF ACTION 1. This action arises out of Plaintiffs purchases of certain residential mortgage-

backed securities (RMBS), as evidenced in the form of Certificates, in reliance on the false and misleading statements that were made by Defendants. Based on these material

misrepresentations and omissions, ABP purchased securities that were far riskier than had been represented, backed by mortgage loans worth significantly less than had been represented, that had been made to borrowers who were much less creditworthy than had been represented. 2. The securities purchased by Plaintiff were collateralized against mortgages

originated through Credit Suisse subsidiaries or purchased from the third-party originators defined in 146-206 below by Credit Suisse (collectively the Originators). Credit Suisse did not, however, hold the mortgage loans it originated and/or acquired. Rather, taking advantage of an unprecedented boom in the securitization industry, Credit Suisse deposited the loans into special purpose entities or trusts, and then repackaged the loans for sale to investors in the form of RMBS. Defendant Credit Suisse Securities, as underwriter, then sold the RMBS to Plaintiff. 3. The Certificates entitled investors to receive monthly distributions of interest and

principal on cash flows from the mortgages held by the trusts. The Certificates issued by each trust were divided into several classes (or tranches) that had different seniority, priorities of payment, exposure to default, and interest payment provisions. Rating agencies, such as

Moodys Investors Service, Inc. (Moodys), Standard & Poors Corporation (S&P), DBRS,

Inc. (DBRS) and/or Fitch, Inc., (Fitch)1 rated the investment quality of all tranches of Certificates based upon information provided by the Defendants about the quality of the mortgages in each mortgage pool and the seniority of the Certificate among the various Certificates issued by each trust. These ratings, in part, determined the price at which these Certificates were offered to investors. 4. In selling the Certificates, the Defendants prepared and filed with the SEC certain

registration statements (the Registration Statements), prospectuses (the Prospectuses) and prospectus supplements (the Prospectus Supplements), which together are collectively referred to as the Offering Documents. In these Offering Documents, Defendants repeatedly touted the strength of their underwriting guidelines and standards or those of the relevant third-party originators; the fact that the underwriting guidelines and standards were designed to ensure the ability of the borrowers to repay the principal and interest on the underlying loans and the adequacy of the collateral; and that the mortgages underlying the Certificates were originated in accordance with those underwriting guidelines and standards. Defendants emphasized the

quality control procedures that the Originators supposedly implemented, such as re-underwriting random samples of mortgage loans to assure asset quality. 5. In addition, in the Offering Documents, Defendants repeatedly assured investors

as to the soundness of the appraisals used to arrive at the value of the underlying properties and, specifically, that the real estate collateralizing the loans had been subjected to objective and independent real estate appraisals that complied with Uniform Standards of Professional Appraisal (USPAP). Defendants made numerous other representations regarding the high

Moodys, S&P, DBRS and Fitch are approved by the SEC as Nationally Recognized Statistical Rating Organizations and provide credit ratings that are used to distinguish among grades of creditworthiness of various securities under the federal securities laws.

quality of the loan pool, including clean transfer of title, high owner-occupancy rates, low loanto-value and combined loan-to-value ratios, high credit ratings, and the existence of credit enhancements. 6. Plaintiff and other investors did not have access to the underlying mortgage loan

files. Instead, the Defendants were responsible for gathering and verifying information about the credit quality and characteristics of the loans that were deposited into each trust, and for presenting this information in the Offering Documents prepared for potential investors. This due diligence process was a critical safeguard for investors such as ABP, who relied on this information in making their investment decisions, and is a fundamental legal obligation of the Defendants. 7. As set forth below, the Offering Documents in fact contained material Contrary to Defendants assurances, the

misstatements and omitted material information.

originators of the underlying loans had not followed their touted underwriting guidelines and standards when originating and/or acquiring the mortgage loans, and Defendants had neither maintained nor conducted quality control procedures. 8. Specifically, as set forth below, Defendants knew of the wholesale and systematic

abandonment of underwriting guidelines both by Credit Suisses own affiliated originators as well as by various third-party originators. Because Credit Suisses affiliated lenders, CSFC and DLJ, operated primarily to generate loans for Credit Suisses RMBS operations and not to hold the loans for their own portfolios, they intentionally granted mortgage loans to borrowers they knew did not satisfy the eligibility criteria as described in the Offering Documents. Faced with Credit Suisses demands for as many loans as possible to securitize, and driven by their desire to

earn massive fees, the third-party originators also offered loans to unqualified borrowers, knowing that Credit Suisse could securitize even risky, low-quality loans. 9. In addition, Defendants knew that the mortgages underlying the Certificates had

been extended based on collateral appraisals that were not independent or performed in accordance with stated guidelines such that the value of the underlying properties and the amount of credit enhancements built into the Certificates were overstated, thereby exposing investors such as Plaintiff to additional losses in the event of foreclosure. In many cases, Defendants also failed to deliver good title to the Issuing Trusts (defined below) in a timely manner, severely undermining the Issuing Trusts capacity to manage the assets that were supposed to be underlying the Certificates. When Defendants did discover problems in the loan pools, they deliberately overlooked them. 10. Indeed, numerous governmental entities have launched investigations into the

subprime mortgage lending industry and subprime mortgage lending practices by major banks and companies, including Credit Suisse. In May 2010, New York State Attorney General Andrew Cuomo issued subpoenas to Credit Suisse and seven other banks, seeking information regarding whether they deceived rating agencies as to the risks of the RMBS they sold. In March 2011, Credit Suisse Group agreed to pay $70 million to settle a class action lawsuit alleging that the bank artificially inflated its stock price by misleading investors about its mortgage holdings. Credit Suisse has also been sued for securities fraud by the Federal Housing Finance Agency (FHFA), which analyzed numerous individual mortgage loans underlying dozens of Credit Suisse RMBS and uncovered evidence that Credit Suisse consistently misrepresented their true risks. On September 28, 2011, the FINANCIAL TIMES reported that the SEC had launched an

investigation into whether Credit Suisse misled its own shareholders about the number of defaulted loans it might be forced to repurchase. 11. As a result of the untrue statements and omissions in the Offering Documents,

Plaintiff purchased Certificates that were far riskier than represented and that were not equivalent to other investments with the same credit ratings. The rating agencies have now significantly downgraded the Certificates purchased by Plaintiff, all of which were represented in the Offering Documents to be Aaa instruments, the highest possible rating on the Moodys scale, or AAA, the highest possible rating on the S&P scale, at the time of purchase. The Certificates, therefore, are no longer marketable near the purchase prices paid by Plaintiff. As a consequence, Plaintiff has suffered losses on its purchases of the Certificates. JURISDICTION AND VENUE 12. This Court has personal jurisdiction over all of the Defendants pursuant to New

York Civil Practice Law and Rules (CPLR) 301 and 302. 13. Venue is proper in this Court pursuant to CPLR 503. Many of the acts and

transactions alleged herein, including the negotiation, preparation and dissemination of many of the material misstatements and omissions contained in the Registration Statements, Prospectuses, and Prospectus Supplements, filed in connection with the Offerings, occurred in substantial part in this State. Additionally, the Certificates were actively marketed and sold in this State. PARTIES A. 14. PLAINTIFF Plaintiff ABP is an independent administrative pension fund established under the

laws of the Kingdom of the Netherlands. ABP serves as the pension fund for public employees in the governmental and education sectors in the Netherlands. With assets under management of

approximately 250 billion, ABP is one of the three largest pension funds in the world. ABP purchased the Certificates from the trusts listed in the table in 54 below. B. 15. DEFENDANTS Defendant Credit Suisse Group is a Swiss company located in Zurich,

Switzerland, that conducts significant business in the United States and in New York, including maintaining an office in New York, New York. Credit Suisse Group is a public global financial services company that provides a comprehensive range of banking, investment banking, asset management and insurance products and services. Credit Suisse Group is the parent company and controlling entity of Defendants Credit Suisse USA, Credit Suisse Holdings, ABS, CSFB Mortgage, Credit Suisse Securities, and CSFC. 16. Defendant CSAG is a Swiss company located in Zurich, Switzerland that is a

banking subsidiary of Defendant Credit Suisse Group. CSAG is an integrated global bank. The governance of Credit Suisse Group and CSAG are fully aligned. The Board of Directors and the Executive Board of each company are comprised of the same individuals. CSAG conducts significant business in the United States and in New York, including maintaining an office in New York, New York. CSAG is the parent company of ABS, Credit Suisse Holdings, Credit Suisse Securities, Credit Suisse USA, CSFB Mortgage, CSFC, DLJ, and SPS. 17. Defendant Credit Suisse USA is an integrated investment bank providing a wide

range of products and services. Credit Suisse USA is a wholly-owned indirect subsidiary, and part of the banking businesses, of Credit Suisse Group. Credit Suisse USA is incorporated in Delaware and has its principal place of business in New York. Credit Suisse USA is the parent company of Credit Suisse Securities, the underwriter of the RMBS at issue in this litigation, and of SPS, the servicer of many loans underlying the RMBS at issue in this litigation.

18.

Defendant Credit Suisse Holdings is a wholly-owned indirect subsidiary of Credit

Suisse Group and operates as a holding company through which Credit Suisse Group holds ownership and operates its United States subsidiaries and affiliates. Credit Suisse Holdings is incorporated in Delaware and has its principal place of business in New York. Credit Suisse Holdings is the parent company of Credit Suisse USA, ABS, CSFB Mortgage, Credit Suisse Securities, DLJ, CSFC and SPS. 19. Defendant ABS is a Delaware corporation with its principal place of business in

New York. ABS acted as depositor and issuer for all of the Asset Backed Securities Corporation Home Equity Loan Trust (ABSC) offerings at issue. ABS is a wholly-owned indirect

subsidiary of Credit Suisse Group and an affiliate of Credit Suisse USA and was formed to, among other things, facilitate the sale of residential mortgage loans through securitizations. 20. Defendant CSFB Mortgage is a Delaware corporation that maintains its principal

place of business in New York. CSFB Mortgage is an indirect, wholly-owned subsidiary of Credit Suisse Group and an affiliate of Credit Suisse USA. CSFB Mortgage was the depositor and issuer for all of the Home Equity Asset Trust (HEAT), Home Equity Mortgage Trust (HEMT) and CSAB Mortgage-Backed Trust (CSAB) offerings at issue. 21. Defendant Credit Suisse Securities, formerly known as Credit Suisse First Boston

LLC, is a limited liability company organized under the laws of Delaware with its principal place of business in New York. Credit Suisse Securities is a wholly-owned subsidiary of Credit Suisse USA and an indirectly-owned subsidiary of Credit Suisse Group. Defendant Credit Suisse Securities was the underwriter in the sale of all of the offerings at issue in this case. 22. Defendant DLJ is a Delaware corporation with its principal place of business in

New York. DLJ is an indirectly owned subsidiary of Credit Suisse Group and an affiliate of

Credit Suisse USA. It acquired the residential loans from the Originators and sponsored the securitization of all of the mortgage loans at issue in this case. In addition to acting as a securitization sponsor, DLJ was also an originator of loans that were pooled into the CSAB Mortgage-Backed Trust 2006-3 securitization, whose Certificates were purchased by Plaintiff. 23. Defendant CSFC is a Delaware corporation with its principal executive offices

located in New Jersey. CSFC, an indirectly owned subsidiary of Credit Suisse Group and an affiliate of Credit Suisse USA, conducts lending through wholesale loan production offices and has been involved in the business of originating mortgage loans since 2003. CSFC conducts business in all fifty states and the District of Columbia, originating approximately $3.2 billion in mortgage loans between 2003 and 2005. CSFC was also an originator of loans that were pooled into the CSAB Mortgage-Backed Trust 2006-3 securitization, whose Certificates were purchased by Plaintiff. On information and belief, CSFC makes loans and conducts business in the state of New York. 24. Defendant SPS is a Utah corporation with its principal executive offices located in

Utah. SPS is an indirectly owned subsidiary of Credit Suisse Group and Credit Suisse USA. It was founded in 1989 and purchased by Defendant Credit Suisse USA in 2005. SPS services mostly subprime residential mortgage loans for clients such as mortgage companies, banks, and bond insurers. It also performs loss recovery and contingency collections, and offers valuation services. SPS serviced some or all of the mortgage loans underlying the Certificates purchased by ABP. 25. 26. 27. Defendant DLJ is referred to as the Sponsor Defendant. ABS and CSFB Mortgage are collectively referred to as the Issuing Defendants. Defendant Credit Suisse Securities is referred to as the Underwriter Defendant.

28. Defendants. 29.

Defendants DLJ and CSFC are collectively referred to as the Originator

All Defendants identified in 15-24 are hereinafter collectively referred to as the

Corporate Defendants. 30. The diagram below depicts the corporate relationships between Credit Suisse

Group, CSAG, Credit Suisse Credit Suisse USA, Credit Suisse Holdings, ABS, CSFC, CSFB Mortgage, Credit Suisse Securities, DLJ, and SPS.

31.

Defendant Jeffrey A. Altabef (Altabef) is an individual residing in New York

who served, at relevant times, as Vice President and Director of CSFB Mortgage. Altabef was also a managing director for real estate finance and securitization at Credit Suisse USA. Altabef signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this action.

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32.

Defendant Joseph M. Donovan (Donovan) is an individual residing in New

York who served, at relevant times, as the Principal Executive Officer, President and Director of ABS. Donovan was also the chairman of asset-backed securities and debt financing at Credit Suisse USA. Donovan signed the Registration Statements for all of the ABSC securitizations at issue in this action. 33. Defendant Evelyn Echevarria (Echevarria) is an individual residing in North

Carolina. She served, at relevant times, as a Director of CSFB Mortgage. Echevarria signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this action. 34. Defendant Juliana Johnson (Johnson) is an individual residing in North

Carolina. She served, at relevant times, as a Director of ABS. Johnson signed the Registration Statements for all of the ABSC securitizations at issue in this action. 35. Defendant Bruce Kaiserman (Kaiserman) is an individual residing in New

York. Kaiserman signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this action. In addition to serving as an officer of CSFB Mortgage, Kaiserman was also a Director and Vice President of Defendant DLJ. 36. Defendant Andrew A. Kimura (Kimura) is an individual residing in New York.

He served, at relevant times, as President and Director of CSFB Mortgage. Kimura was also a managing director and co-head of structured products at Credit Suisse USA. Kimura signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this action. 37. Defendant Michael A. Marriott (Marriott) is an individual residing in New

York. He served, at relevant times, as a Director of CSFB Mortgage. Marriott was also a

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managing director and co-head of structured products at Credit Suisse USA. Marriott signed the Registration Statements for all of the HEAT, HEMT and CSAB securitizations at issue in this action. 38. Defendant Carlos Onis (Onis) is an individual residing in Connecticut. He

served, at relevant times, as Vice President and Director of ABS. Onis was also a managing director, and senior finance officer of the Investment Banking Division of Credit Suisse USA. Onis signed the Registration Statements for all of the ABSC securitizations at issue in this action. 39. Defendant Greg Richter (Richter) is an individual residing in New York. He

served, at relevant times, as Vice President of ABS. Richter was also a managing director and co-head of the asset finance group at Credit Suisse USA. Richter signed the Registration Statements for all of the ABSC securitizations at issue in this action. 40. Defendant Thomas Zingalli (Zingalli) is an individual residing in New York.

Zingalli was, at relevant times, Principal Accounting Officer and Controller of CSFB Mortgage and Principal Financial Officer, Principal Accounting Officer, Vice President and Controller of ABS. Zingalli signed the Registration Statements for all of the securitizations at issue in this action. 41. Defendants Altabef, Donovan, Echevarria, Johnson, Kaiserman, Kimura, Onis,

Marriott, Richter and Zingalli are collectively referred to as the Individual Defendants. The Individual Defendants signed the Registration Statements listed in the table below. Issuing Trust(s) HEMT 2005-5 Document Date December 7, 2005 File No. 333-127872 Signatories Jeffrey A. Altabef Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli Jeffrey A. Altabef

HEAT 2006-5

March 31, 2006

333-130884

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Issuing Trust(s) HEAT 2006-6

Document Date

File No.

Signatories Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli Joseph M. Donovan Juliana Johnson Carlos Onis Thomas Zingalli Jeffrey A. Altabef Evelyn Echevarria Andrew A. Kimura Michael A. Marriott Thomas Zingalli

ABSC 2006-HE6 ABSC 2006-HE7 ABSC 2007-HE1 ABSC 2007-HE2 CSAB 2006-3 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1

March 15, 2006

333-131465

August 10, 2006

333-135481

C. 42.

RELEVANT NON-PARTIES Non-parties, the Issuing Trusts, are New York common law trusts. The Issuing

Trusts were created and structured by the Originator Defendants, Issuing Defendants and their affiliated entities to issue billions of dollars worth of RMBS. The Issuing Trusts issued the Certificates purchased by Plaintiff. The non-party Issuing Trusts are: ABSC Loan Trust, Series MO 2006-HE6 ABSC Loan Trust, Series AMQ 2006-HE7 ABSC Loan Trust, Series RFC 2007-HE1 ABSC Loan Trust, Series AMQ 2007-HE2 CSAB Mortgage-Backed Trust 2006-3 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1

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HEMT 2005-5

(together, the Issuing Trusts) SUBSTANTIVE ALLEGATIONS I. THE SECURITIZATION PROCESS GENERALLY 43. Traditionally, the process for extending mortgage loans to borrowers involved a

lending institution (the loan originator) making a loan to a home buyer in exchange for a promise, documented in the form of a promissory note, by the home buyer to repay the principal and interest on the loan. The loan originator obtained a lien against the home as collateral in the event the home buyer defaulted on its obligation. Under this simple model, the loan originator held the promissory note until it matured and was exposed to the risk that the borrower might fail to repay the loan. As such, the loan originator had a financial incentive to ensure that the borrower had the financial wherewithal to repay the loan, and that the underlying property had sufficient value to enable the originator to recover its principal and interest in the event that the borrower defaulted. 44. Beginning in the 1990s, however, banks and other mortgage lending institutions

increasingly used securitization to finance the extension of mortgage loans to borrowers. Under the securitization process, after a loan originator issues a mortgage to a borrower, the loan originator sells the mortgage to a third-party financial institution, or sometimes to a related corporate entity. By selling the mortgage, the loan originator not only obtains fees, but receives the proceeds from the sale of the mortgage up front, and thereby has new capital with which to issue more mortgages. The financial institutions which purchase the mortgages then pool the mortgages together and securitize the mortgages into what are commonly referred to as residential mortgage-backed securities or RMBS. In this manner, unlike the traditional process for extending mortgage loans, the loan originator is no longer subject to the risk that the

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borrower may default; that risk is transferred with the mortgages to investors who purchase the RMBS. 45. The securitization of residential mortgage loans, and the creation of RMBS

collateralized against these loans, typically follows the same structure and pattern in each transaction. First, a loan originator, such as a mortgage lender or bank, originates the underlying residential mortgage loans. After a loan has been made, a sponsor or seller (which either originated the loans itself or acquired the loans from other loan originators) sells the mortgage loans to a depositor. The depositor pools these loans and deposits them into a special purpose entity or trust created by the depositor. One trust is established to hold the pool of mortgages for each proposed offering. In order to facilitate multiple offerings of RMBS, a depositor sets up multiple trusts to hold the different pools of mortgages that are to be securitized. With respect to each offering, in return for the pool of mortgages acquired from the depositor, the trust issues and distributes RMBS certificates to the depositor. The depositor then works with an

underwriter to price and sell the certificates to investors. Thereafter, a servicer is appointed to service the mortgage loans held by the trust, i.e., to collect the mortgage payments from the borrower in the form of principal and interest, and to remit them to the trust for administration and distribution to the RMBS investors. The diagram below illustrates the typical structure of a securitization:

15

46.

In selling the certificates to investors, the depositor and underwriters disseminate

to investors various disclosure or offering documents describing the certificates being sold. The offering documents including: (1) a shelf registration statement (under SEC Rule 415, an issuer may file one registration statement covering several offerings of securities made during a period of up to three years after the filing of the registration statement); (2) a base prospectus and (3) a prospectus supplement. The depositor files one shelf registration statement and one base prospectus that apply to multiple trusts that the depositor proposes to establish. With respect to each particular trust, the depositor also files a prospectus supplement. Thus, for any given offering of securities, the relevant offering documents will typically be a shared registration statement and shared base prospectus, as well as a trust-specific prospectus supplement.

16

47.

Each investor who purchases an RMBS certificate is entitled to receive monthly

payments of principal and interest from the trust. The order of priority of payment to each investor, the interest rate to be paid to each investor, and other payment rights accorded to each investor depend on which class or tranche of certificates the investor purchases. 48. The highest or senior tranche is the first to receive its share of the mortgage

payments and is also the last to absorb any losses should mortgage borrowers become delinquent or default on their mortgages. Accordingly, these senior tranches receive the highest investment rating by the rating agencies, usually Aaa. After the senior tranche, the middle tranches (referred to as mezzanine tranches) next receive their share of the proceeds. These mezzanine tranches are generally rated from Aa2 to Ba2 by the rating agencies. The process of distributing the mortgage proceeds continues down the tranches through to the bottom tranches, referred to as equity tranches. This process is repeated each month and all investors receive the payments owed to them so long as the mortgage borrowers are current on their mortgages. All of the Certificates purchased by Plaintiff were also represented to be overcollateralized, so payments could be made in the event that mortgage borrowers fell behind. II. THE SECURITIZATIONS ASSOCIATED WITH THE PLAINTIFFS CERTIFICATES AND ITS INVESTMENTS IN THE CERTIFICATES 49. In this case, the Issuing Trusts and the Certificates purchased by Plaintiff were

structured and sold by Credit Suisse Group and its affiliated entities. As such, the transactions between the sponsor/seller, depositors, underwriter, and the Issuing Trusts were not arms length transactions, as all of the entities involved in the transactions were related. 50. Depositor Defendant ABS created the following Issuing Trusts (1) ABSC 2006-

HE6; (2) ABSC 2006-HE7; (3) ABSC 2007-HE1; and (4) ABSC 2007-HE2. Defendant CSFB Mortgage then purchased mortgage loans from another Defendant, DLJ, to place into these

17

trusts.

In addition, the Certificates issued by these Issuing Trusts were underwritten by

Defendant Credit Suisse Securities. 51. Similarly, all of the entities that structured the remaining Certificates purchased

by Plaintiff ABP were controlled by Credit Suisse. Depositor Defendant CSFB Mortgage, a Credit Suisse entity, created the Issuing Trusts (1) CSAB 2006-3; (2) HEAT 2006-5; (3) HEAT 2006-6; (4) HEAT 2006-7; (5) HEAT 2006-8; (6) HEAT 2007-1; and (7) HEMT 2005-5. CSFB Mortgage then purchased mortgage loans from another Credit Suisse entity, the Sponsor Defendant DLJ, to place into the trust. DLJ and another Credit Suisse entity, Defendant CSFC, originated some of the mortgages pooled into the CSAB 2006-3 Trust. In addition, the

Certificates issued by all of these trusts were underwritten by another Credit Suisse entity: Defendant Credit Suisse Securities. 52. In connection with their role as the depositors for the Issuing Trusts that are the

subject of this action, Defendants ABS and CSFB Mortgage prepared and filed with the SEC the following shelf registration statements, signed by the Individual Defendants, to which the Certificates purchased by Plaintiff are traceable: ABS Registration Statement 333-131465 Date Filed March 15, 2006 Amount Registered $14,235,812,010

CSFB Mortgage Registration Statement 333-135481 Date Filed August 10, 2006 Amount Registered $13,000,000,000

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Registration Statement 333-130884 333-127872

Date Filed March 31, 2006 December 7, 2005

Amount Registered $18,019,457,044 $25,999,000,000

53.

At the time of filing, the Registration Statements, which were signed by the

Individual Defendants, contained an illustrative form of a Prospectus Supplement that would be used in the various offerings of Certificates. At the effective date of a particular offering of Certificates, Credit Suisse Securities, in its role as the underwriter for the Certificates, prepared and filed a final Prospectus Supplement with the SEC containing a more specific description of the mortgage pool for that particular offering of Certificates, and the underwriting standards by which the mortgages were originated. Credit Suisse Securities then marketed and sold the Certificates pursuant to these Prospectus Supplements. 54. The following chart summarizes and identifies (1) each Issuing Trust that issued

and sold the Certificates purchased by Plaintiff; (2) the dates of the Registration Statements and Prospectus Supplements pursuant to which the Certificates were issued and sold; and (3) the identities of the depositor, the issuer, underwriters, and the sponsor/seller for each offering.

Amended Registration Statement Date

Issuing Trust

Prospectus Supplement Date

Depositor

Underwriter(s)

Sponsor/ Seller

12/7/2005

Home Equity Mortgage Trust 2005-5

12/29/2005

CSFB Mortgage

Credit Suisse Securities

DLJ

19

Amended Registration Statement Date


3/31/2006

Issuing Trust

Prospectus Supplement Date

Depositor

Underwriter(s)

Sponsor/ Seller

Home Equity Asset Trust 2006-5

7/6/2006

CSFB Mortgage

Credit Suisse Securities

DLJ

Home Equity Asset Trust 2006-6

8/1/2006

CSFB Mortgage

Credit Suisse Securities

DLJ

4/3/2006

Asset Backed Securities Corp. Home Equity Loan Trust, Series MO 2006-HE6

12/1/2006

ABS

Credit Suisse Securities

DLJ

Asset Backed Securities Corp. Home Equity Loan Trust, Series AMQ 2006-HE7

12/1/2006

ABS

Credit Suisse Securities

DLJ

Asset Backed Securities Corp. Home Equity Loan Trust, Series RFC 2007-HE1

2/6/2007

ABS

Credit Suisse Securities

DLJ

Asset Backed Securities Corp. Home Equity Loan Trust, Series AMQ 2007-HE2

6/4/2007

ABS

Credit Suisse Securities

DLJ

8/10/2006

Home Equity Asset Trust 2006-7

10/3/2006

CSFB Mortgage

Credit Suisse Securities

DLJ

20

Amended Registration Statement Date

Issuing Trust

Prospectus Supplement Date

Depositor

Underwriter(s)

Sponsor/ Seller

CSAB MortgageBacked Trust 2006-3

10/30/2006

CSFB Mortgage

Credit Suisse Securities

DLJ

Home Equity Asset Trust 2006-8

12/4/2006

CSFB Mortgage

Credit Suisse Securities

DLJ

Home Equity Asset Trust 2007-1

2/1/2007

CSFB Mortgage

Credit Suisse Securities

DLJ

III.

IMPORTANT FACTORS IN THE DECISION OF INVESTORS SUCH AS PLAINTIFF TO INVEST IN THE CERTIFICATES 55. In purchasing the Certificates, Plaintiff, like other investors, attached critical

importance to: (a) the underwriting standards used to originate the loans underlying the Certificates; (b) the value of the properties securing the underlying mortgage loans and the appraisal methods used to determine this value; (c) the ratings assigned to the Certificates; (d) the level of credit enhancement applicable to the Certificates; and (e) the ability of the Issuing Trusts to establish legal title to the underlying loans. 56. Sound underwriting was critically important to Plaintiff because the ability of

borrowers to repay principal and interest was the fundamental basis upon which the investments in the Certificates were valued. Reflecting the importance of the underwriting standards, the Offering Documents contained representations concerning the purportedly rigorous standards used to originate the mortgages held by the Issuing Trusts.

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57.

For example, each of the Registration Statements issued by CSFB Mortgage

represented that: The depositor expects that the originator of each of the loans will have applied, consistent with applicable federal and state laws and regulations, underwriting procedures intended to evaluate the borrowers credit standing and repayment ability and/or the value and adequacy of the related property as collateral. Each of the Registration Statements issued by ABS similarly indicated the importance of loan underwriting. 58. In addition, the Prospectus Supplements indicated that the underwriting guidelines

were primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the mortgaged property as collateral for the mortgage loan. 59. With respect to loans acquired from third-party originators, the Prospectus

Supplements represented that the originators guidelines required the mortgages to have been underwritten in accordance with a view toward the resale of the loans in the secondary mortgage market. The Prospectus Supplements represented that the originators guidelines required the originators to consider, among other things, the mortgagors credit history, repayment ability, and debt-to-income ratio, as well as the type and use of the mortgaged property. In addition, the Prospectus Supplements represented that in order to submit loan packages, each of the thirdparty originators must have met certain minimum underwriting standards, and that the loans must have been in compliance with the terms of a signed mortgage loan purchase agreement. 60. Real estate appraisals are governed by USPAP, which are the generally accepted

standards for professional appraisal practice in North America promulgated by the Appraisal Standards Board of the Appraisal Foundation, as authorized by Congress. With respect to real estate appraisals, USPAP requires the following: An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of

22

personal interests. An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions. ***** It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following: 1. 2. 3. 4. 5. the reporting of a predetermined result (e.g., opinion of value); a direction in assignment results that favors the cause of the client; the amount of a value opinion; the attainment of a stipulated result; or the occurrence of a subsequent event directly related to the appraisers opinions and specific to the assignments purpose.2

61.

Reflecting the importance of independent and accurate real estate appraisals to

investors such as ABP, the Offering Documents contained extensive disclosures concerning the value of the collateral underlying the mortgages pooled in the Issuing Trusts, and the appraisal methods by which such values were obtained. 62. For example, the Offering Documents represented that the properties securing the

mortgages were to be appraised by qualified, independent appraisers in conformity with USPAP and/or using market value analyses based on recent sales of comparable homes nearby. 63. Independent and accurate real estate appraisals were also critically important to

investors such as Plaintiff because they ensured that the mortgage loans underlying the Certificates were not under-collateralized, thereby protecting RMBS investors in the event that a borrower defaulted on a loan. As such, by allowing RMBS investors to assess the degree to
2

Unless otherwise noted, all emphases are added and internal citations are omitted.

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which a mortgage loan was adequately collateralized, accurate appraisals provided investors such as Plaintiff with a basis for assessing the price and risk of the Certificates. 64. One measure that uses the appraisal value to assess whether mortgage loans are The LTV ratio is a mathematical

under-collateralized is the loan-to-value (LTV) ratio.

calculation that expresses the amount of a mortgage as a percentage of the total value of the property, as obtained from the appraisal. For example, if a borrower seeks to borrow $900,000 to purchase a house worth $1,000,000, the LTV ratio is $900,000/$1,000,000, or 90%. If, however, the appraised value of the house is artificially increased to $1,200,000, the LTV ratio drops to just 75% ($900,000/$1,200,000). 65. From the perspective of lenders, and investors such as Plaintiff, the higher the

LTV ratio, the riskier the loan, because it indicates that the borrower has a lower equity stake, and a borrower with a lower equity position has less to lose if s/he defaults on the loan. The LTV ratio is a significant measure of credit risk because both the likelihood of default and the severity of loss are higher when borrowers have less equity to protect in the event of foreclosure. Worse, particularly in an era of falling housing prices, a high LTV ratio creates the heightened risk that, should the borrower default, the amount of the outstanding loan may exceed the value of the property. 66. The rating assigned to each of the Certificates was another important factor in

Plaintiffs decisions to purchase the Certificates. Plaintiff relied on the ratings as an indicator of the safety and likelihood of default of the mortgage loans underlying a particular Certificate. Consistent with its conservative corporate investment guidelines, Plaintiff purchased the Certificates because they all were rated Aaa.

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67.

In purchasing the Certificates, Plaintiff further relied on the ability of each of the

Issuing Trusts to be able to show that it in fact had legal title to the underlying mortgage loans. Plaintiff would never have purchased any of the Certificates from Defendants if there was any doubt as to whether the Issuing Trusts had legal title to any of the mortgage loans that were pooled for each offering because without that, the Issuing Trusts, and therefore investors, had no right to the income streams the principal and interest payments should have generated. 68. Finally, the Prospectus Supplements represented the level of credit enhancement,

or loss protection, associated with the Certificates. Credit enhancements impact the overall credit rating that a Certificate receives. The amount of credit enhancements built into the Certificates was overstated, which exposed Plaintiff to additional losses. These levels of credit enhancement were material to Plaintiff. IV. DEFENDANTS KNOWINGLY MISREPRESENTED THE QUALITY OF THE SECURITIES THEY ORIGINATED OR ACQUIRED AND PACKAGED FOR SALE TO INVESTORS SUCH AS ABP 69. In the late 1990s and early 2000s, an unprecedented boom in the housing market

began to unfold. Between 1994 and 2006, the housing market experienced a dramatic rise in home ownership, as more than 12 million more Americans became homeowners. Likewise, the subprime market grew dramatically, enabling more and more borrowers to obtain credit who traditionally would have been unable to access it. According to INSIDE MORTGAGE FINANCE, from 1994 to 2006, subprime lending increased from an estimated $35 billion, or 4.5% of all one-to-four family mortgage originations, to $600 billion, or 20% of originations. 70. To ride this housing boom, financial firms aggressively pushed into the complex,

high-margin business of securitization, i.e., packaging mortgages and selling them to investors as RMBS. This aggressive push created a boom for the mortgage lending industry. Mortgage originators generated profits primarily through the sale of their loans to financial firms such as 25

Credit Suisse, and the originators were therefore driven to originate and to sell as many loans as possible. Increased demand for mortgages by financial institutions like Credit Suisse led to increased volume in mortgage originations. Originators began to borrow money from the same large banks that were buying their mortgages in order to fund the origination of even more mortgages. By buying and packaging mortgages, Wall Street firms enabled the lenders to extend credit even as the number of creditworthy borrowers sank and dangers in the housing market grew. This emphasis on volume over sound underwriting led to predictable results. The FBI reported that an analysis of more than 3 million loans revealed that between 30 and 70 percent of early payment defaults (EPDs), or defaults which occur within a few months of the loans origination, were linked to significant misrepresentations in the original loan applications. When a borrower fails to make payments so soon after taking out a loan, it is a strong sign that the loan should never have been made in the first place and a possible indicia of fraud. 71. In the instant action, the players that structured the Certificates purchased by

Plaintiff were Credit Suisse and its affiliated entities. Credit Suisse embarked on a scheme to profit from the housing boom by acquiring or partnering with subprime lenders, such as the originators described in 146-206 below, and then directing or encouraging these lenders to originate and purchase large numbers of mortgage loans, regardless of the borrowers ability to pay, so that the loans could then be quickly flipped at a profit on to an unsuspecting secondary market (that is, RMBS investors such as ABP). 72. Credit Suisse reaped billions of dollars in profits from its RMBS activities during

the U.S. housing boom. Credit Suisse was a vertically integrated business with a hand in nearly every stage of the mortgage securitization business, including originating, purchasing, and selling residential mortgage loans, bundling mortgages into RMBS, and selling them to

26

investors. The company garnered enormous profits at each of these steps. In addition, Credit Suisse pocketed the difference between what it paid to originate or to purchase a pool of mortgage loans, and what it received from selling those loans into a securitization. Credit Suisse Securities also obtained underwriting fees and commissions from selling the RMBS it had securitized to investors. According to Credit Suisse Groups Form 20-F Annual and Transition Report, filed on March 20, 2008, for the period ending December 31, 2007, Credit Suisse Group received gains of 218 million Swiss francs (approximately $197 million) from its RMBS activities between 2005 and 2007. 73. Unlike arms-length securitizations where the loan originator, depositor,

underwriters, and issuers are unrelated third parties, here the transactions among the sponsor (DLJ); the depositor (ABS or CSFB Mortgage); the underwriter (Credit Suisse Securities); and the Issuing Trusts were not arms-length transactions at all, as Credit Suisse Group controlled every aspect of the securitization process. 74. The mortgage loans underlying the Certificates were originated by the Credit

Suisse-controlled entities, DLJ and CSFC, or by a third-party originator, and acquired by the sponsor, DLJ. Credit Suisse Groups indirect subsidiaries ABS and CSFB Mortgage were corporations structured as limited purpose entities to acquire mortgage loans from DLJ and to transfer the loans to the Issuing Trusts for sale to investors as RMBS. As the depositors, ABS and CSFB Mortgage were shell corporations with no assets of their own, and had the same directors and officers as other Credit Suisse entities. Through these directors/Credit Suisse executives, Credit Suisse Group exercised actual day-to-day control over ABS and CSFB Mortgage. Revenues flowing from the issuance and sale of the Certificates were passed through to Credit Suisse Group.

27

75. Trusts.

The Depositor Defendants, ABS and CSFB Mortgage, in turn created the Issuing

Like the Depositor Defendants, the Issuing Trusts were shell entities that were

established for the sole purpose of holding the pools of mortgage loans assembled by the Depositor Defendants, and issuing Certificates collateralized against these mortgage pools to underwriters for sale to the public. Through the Depositor Defendants, Credit Suisse Group also exercised actual control over the Issuing Trusts. 76. Once the Issuing Trusts issued the Certificates, the Certificates were purchased by

Credit Suisse Securities, another indirect subsidiary of Credit Suisse Group. In sum, Credit Suisse Group maintained a high level of day-to-day scrutiny and control over its subsidiaries, and controlled the entire process leading to the sale of the Certificates to ABP. 77. Credit Suisse had direct insight into the true quality of the loans underlying the

Certificates it issued to Plaintiff. As a Credit Suisse analyst stated in a research report dated March 12, 2007: In the past five years, subprime purchase originators have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. As one private builder indicated to us, in the past nine months anybody with a pulse that was interested in buying a home was able to get financing, which certainly helps explain the poor performance thus far of 2006 loan vintages. 78. Similarly, in May 2007, Defendant Marriott commented at a roundtable

discussion at a Mortgage Banker Association conference that, Theres no way we could have had the [mortgage default] storm we had without fraud being a part of it. Credit Suisse knew of the poor quality of the loans in its own RMBS pools through, inter alia, its ownership and control of CSFC and DLJ two of the originators that produced low-quality loans underlying ABPs RMBS; its course of dealings with third-party originators; the due diligence that Credit

28

Suisse performed on the loans; its servicing activities, which allowed it to track loan performance; and its monitoring of the housing market. 79. Prior to underwriting and selling the Certificates to investors such as Plaintiff,

Defendants had identified but failed to disclose the widespread underwriting and appraisal deficiencies by the Originators, including Defendants CSFC and DLJ, which were wholly owned and controlled by Credit Suisse, as described above. This was in direct contradiction to the representations in the Offering Documents accompanying the Certificates sold to Plaintiff. 80. As has now come to light, contrary to the representations in the Offering

Documents, Defendants CSFC and DLJ, and the third-party originators, all of which originated the mortgages underlying the Certificates, knowingly departed from the underwriting and appraisal standards that were represented in the Offering Documents. Credit Suisse Group, CSAG, Credit Suisse USA, Credit Suisse Holdings, the Issuing Defendants, Sponsor Defendant, and Underwriter Defendant were all aware of these departures from sound lending practices, but nonetheless continued to package defective loans into securitizations and sell them to unsuspecting investors such as Plaintiff. A. CREDIT SUISSE DISREGARDED UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS IN ITS OWN VERTICALLY INTEGRATED MORTGAGE LENDING OPERATIONS Credit Suisse itself participated in mortgage loan origination through subsidiaries

81.

such as CSAG, CSFC, DLJ and Lime Financial Services Ltd. (Lime Financial), which it controlled as part of a vertically integrated mortgage lending and securitization business. It has since come to light that these entities, like the other originators that contributed loans to Credit Suisse securitizations, disregarded their stated underwriting guidelines so as to generate more loans for resale to RMBS investors like Plaintiff.

29

1. 82.

DLJ Mortgage Capital, Inc.

DLJs unscrupulous lending practices have also resulted in numerous lawsuits. In

May 2007, Sterling Federal Bank (Sterling) brought a securities action against DLJ and several other Credit Suisse entities in the Northern District of Illinois, alleging that defendants sold the plaintiff securities that suffered from a series of ratings downgrades shortly after they were purchased, resulting in significant losses. Specifically, Sterling claimed that defendants knew that many of the mortgage loans underlying the securities were: (a) originated with inadequate underwriting criteria; (b) originated in such a way as to result in excessive risk to [plaintiff]; (c) originated with a large volume of poor quality loans; (d) originated by wholesale originators who were openly and actively engaging in improper lending practices; (e) originated as adjustable rate mortgages to subprime borrowers by qualifying the borrowers with low initial payments without an appropriate analysis of the borrowers ability to make payments at the fully indexed rate; (f) originated as to borrowers without considering appropriate documentation and/or verification of their income; (g) originated containing features requiring frequent refinancing; (h) originated to borrowers with inadequate debt-to-income ratios; and (i) originated without properly considering borrowers ability to meet their overall level of indebtedness. Further, Sterling alleged that defendants withheld material information from Moodys that resulted in Moodys issuing a higher than warranted rating. See Sterling Federal Bank, F.S.B., v. Credit Suisse First Boston Corp., No. 07-cv-2922 (N.D. Ill. filed May 2007). The litigation settled in July 2009. 83. DLJ has also been sued by its own insurers. In January 2010, Ambac Assurance

Corp. (Ambac), a bond insurer, sued DLJ and Credit Suisse Securities in New York State court, alleging that they had misled Ambac regarding a pool of over 2,000 mortgage loans in 2007 which had since defaulted at a remarkable rate. Ambac reviewed a sample of 744 loan files for the underlying mortgages, and found that 593 of them approximately 80% of the sample

30

breached DLJs representations and warranties. The breaches included failure to determine whether stated incomes were reasonable, lending to borrowers with debt-to-income and LTV ratios above the allowed maximums, failures of borrowers to accurately disclose their liabilities, and misrepresentations of borrower income, assets, employment, or intent to occupy the property. See Ambac Assurance Corp. v. DLJ Mortgage Capital, Inc., No. 600070/2010 (Sup. Ct. N.Y. Co. filed Jan. 12, 2010). 84. DLJ was sued by Massachusetts Mutual Life Insurance Co. (Mass Mutual) and

Allstate Insurance Company (Allstate) in February 2011, each alleging that DLJ originated or acquired loans on the basis of overstated incomes, inflated appraisals, false verifications of employment, and exceptions to underwriting criteria that had no proper justification. Mass Mutual conducted a loan-level review which revealed that the loans sampled contained drastically higher LTV ratios and drastically lower owner-occupancy rates than the rates proffered by defendants in the offering documents. In particular, Mass Mutuals review

determined that 43% of the loans tested had appraisals that were inflated by 10% or more. Allstate conducted a loan-level analysis of over 11,000 mortgage loans across eight different offerings and likewise found evidence of lower owner-occupancy rates, higher debt-to-income ratios, and higher LTV ratios than those disclosed in the offering documents. See Massachusetts Mut. Life Ins. Co. v. DLJ Mortgage Capital, Inc., No. 11-cv-30047-MAP (D. Mass filed Feb. 25, 2011); Allstate Ins. Co. v. Credit Suisse Securities (USA) LLC, No. 650547/2011 (Sup. Ct. N.Y. Co. filed Feb. 28, 2011). 85. MBIA Insurance Corp. (MBIA), another of Credit Suisses insurers, conducted

an investigation into loan files for HEMT 2007-1, a DLJ originated RMBS from the same series and time period as some of the RMBS purchased by ABP, after it was asked to make payments

31

on insurance policies. MBIAs investigation revealed that 87% of the defaulted or delinquent loans in those securitizations contained breaches of DLJs representations and warranties. 86. During the course of MBIAs subsequent suit against DLJ for fraud and breach of

contract, MBIA revealed that the SEC had commenced an investigation of Credit Suisse, subpoenaing documents related to the standards under which Credit Suisse securitized loans. See Jody Shenn & Shannon Harrington, SEC Subpoenas Credit Suisse Over Mortgages, MBIA Says, BLOOMBERG, May 5, 2011. 87. In a related filing, MBIA stated that Credit Suisse has produced emails that prove

that as early as February 2006, Credit Suisse itself had become aware that the mortgage loans that it was pooling for securitization had been originated in violation of the applicable underwriting guidelines. See Pl.s Mem. Further Supp. of Mot. to Compel at 9, MBIA Ins. Corp. v. Credit Suisse Sec., No. 603751/2009 (Sup. Ct. N.Y. Co. May 5, 2011). 88. In October 2011, DLJ was sued by Assured Guaranty Municipal Corporation

(Assured), another insurer, in New York State court. Assured alleged that DLJ had breached its obligations under the Pooling and Servicing Agreements (PSA) of securitizations that Assured had purchased from DLJ. Specifically, Assured alleged that 93 percent of reviewed loans breached one or more of DLJs representations regarding underwriting. See Assured Guar. Mun. Corp. v. DLJ Mortgage Capital, Inc., No. 652837/2011 (Sup. Ct. N.Y. Co. filed Oct. 17, 2011). Thus, a number of independent reviews of DLJ mortgage pools have consistently

uncovered evidence of large-scale misrepresentations and underwriting failures. 89. On information and belief, the loans underlying the Certificates purchased by

ABP suffer from the same or similar deficiencies as those described above. As DLJ was part of

32

Credit Suisses vertically integrated securitization operation, Credit Suisse had unique insight into the scope and scale of the problems with its subsidiary and the loans it originated. 2. 90. loans Credit Suisse Financial Corp.

CSFC is engaged in the business of originating and funding residential mortgage

and/or purchasing already closed residential mortgage loans from mortgage lenders.

CSFCs questionable lending practices have made it the target of many lawsuits. In March 2008, CSFC was sued in New York for allegations that it engaged in a scheme to defraud unsophisticated, low-income, minority borrowers by targeting and inducing them to buy dilapidated properties at intentionally over-appraised and fraudulently inflated prices. The

complaint alleged that CSFC and the other defendants proffered the properties as a good deal, required no down payment, and never collected any employment or salary information from the borrower. See Martin v. Fitzpatrick Neil St. Hill Dodson, Esq., No. 08-cv-1311 (E.D.N.Y. filed Mar. 31, 2008). CSFC settled the case on June 2, 2009. 91. CSFC has also faced lawsuits in California for its questionable practices there.

The suits alleged that CSFC qualified borrowers for loans based on inflated income statements without the borrowers knowledge or consent, misrepresented the nature of adjustable rate mortgages to unsophisticated borrowers, and engaged in purposeful predatory lending practices. 3. 92. Lime Financial Services Ltd.

Lime Financial, founded in 1999, was a national wholesale subprime mortgage

lender that, at its peak originated over $2.1 billion in subprime loans. In November 2006, Lime Financial expanded its business, acquiring a portion of the sales and operations staff of Meritage Mortgage Corporation (Meritage), a subsidiary of NetBank. 93. Eager to keep pace with its competition, such as Lehman Brothers and

Countrywide Financial Corp., in the expanding industry of rapid origination, securitization and 33

sale of securities backed by residential mortgage loans to investors, Credit Suisse acquired Lime Financial in October 2007. According to an April 18, 2007 article in AMERICAN BANKER, Credit Suisse head of fixed income Jim Healy said that Credit Suisse had added origination and servicing capacity to its mortgage securitization business as part of efforts to expand the business, and that Lime represents an opportunity to incrementally grow our platform. Credit Suisse also said that it would hire Lime Financials senior management team, marketing team, and sales force. Lime Financial was an originator of mortgage loans pooled into RMBS

purchased by ABP, including HEAT 2006-6, HEAT 2006-7, HEAT 2006-8 and HEAT 2007-1. 94. Much of Lime Financials success in the subprime industry was the result of its

questionable lending practices. The company, like many of the other Originators, targeted borrowers with low income or poor credit and provided them with loans that far exceeded what they were able to afford. The company also routinely ignored its own underwriting guidelines in order to ramp up loan originations and generate enormous profits. 95. As a result of this conduct, Lime Financial became the target of many lawsuits.

For example, in July 2008, a class action complaint was filed in the District of Oregon alleging that Lime Financial violated the Truth-In-Lending-Act (TILA). See Ward v. Lime Fin. Servs., No. 08-cv-840-AC (D. Or. filed July 16, 2008). Plaintiffs claimed that Lime Financial failed to disclose material information about the loans borrowers were receiving, including information pertaining to finance charges and right-to-cancel notices. Plaintiffs sought rescission of the loan agreements. Several other Lime Financial borrowers have also come forward, charging the company with fraudulently inducing unqualified borrowers to take out loans that Lime Financial knew they could not afford. See, e.g., Valenzuela v. Lime Fin. Servs., Ltd., No. 10-cv-00502-

34

RCJ-VPC (D. Nev. filed Aug. 10, 2010); Azurdia v. Lime Fin. Servs., No. 10-cv-00330-MHP (N.D. Cal. filed Jan. 25, 2010). 96. Because these practices were occurring within Credit Suisses own affiliated

entities, Defendants had a unique insight into, but did not disclose the poor quality of the underlying loans that were being included in the securitizations that were sold to investors such as Plaintiff ABP. B. 97. CREDIT SUISSE WAS AWARE THAT THIRD-PARTY ORIGINATORS WERE ABANDONING THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS Before loans were pooled for securitization, Credit Suisse received reports from

its due diligence vendors indicating that many of them did not comply with underwriting guidelines and possessed no grounds for making exceptions to the guidelines. Yet Credit Suisse ignored that information and permitted many of the defective loans to be securitized anyway. Credit Suisse required third-party originators to compensate it for defective loans, but did not remove those loans from securitization pools or pass its recoveries on to the RMBS investors. Furthermore, Credit Suisse was responsible for servicing many of the loans that it securitized by collecting mortgage payments, forwarding payments to the Issuing Trusts for distribution to investors, and foreclosing on delinquent properties. These activities brought Credit Suisse into direct contact with borrowers, alerting it to the decline in underwriting standards and the fact that many borrowers had been given inappropriate loans. Through these and other channels, Credit Suisse learned that the third-party-originated loans in its securitization pools had not been generated in accordance with the underwriting guidelines stated in the Offering Documents. 1. 98. Credit Suisse Ignored Evidence of Underwriting Failures From Its Due Diligence Vendor

During the housing boom, Credit Suisse and other issuers of RMBS hired Clayton

Holdings LLC (Clayton) to conduct due diligence to review whether the loans to be included 35

in their RMBS offerings complied with the law and met the lending standards that the originators said that they were using. Claytons Form 10-K filed on March 14, 2008, represented that Clayton provides services to the leading buyers and sellers of, and investors in, residential and commercial loan portfolios and securities ... includ[ing] major capital markets firms, banks and lending institutions, including the largest MBS issuers/dealers. 99. California. On September 23, 2010, hearings were held by the FCIC in Sacramento, Part of the hearings involved the role that Clayton played in the mortgage

securitization process. Claytons Senior Vice President of Transaction Management Vicki Beal (Beal) suggested that, rather than directing due diligence firms to conduct thorough portfolio reviews that would most likely identify defective loans, the investment banks, such as Credit Suisse, pressured loan reviewers to disregard the problematic loans through the use of exceptions and offsets, even in cases where such practices did not satisfy the applicable underwriting guidelines. 100. Clayton reviewed approximately 911,000 loans for 23 investment or commercial

banks, including Credit Suisse, and summarized its findings in an internal report (the Trending Report) which was first made publically available in September 2010 following the FCICs hearings. The Trending Report covered roughly 10% of the total number of mortgages Clayton was contracted to review. Clayton graded each loan for credit and compliance by using the following grading scale: Event 1, loans that meet guidelines; Event 2, loans that do not meet guidelines but have sufficient compensating factors; and Event 3, loans that do not meet guidelines and have insufficient compensating factors. According to a September 30, 2010 letter from Clayton to the FCIC, Trending Report data was available to Claytons clients (i.e., the investment banks) but was not shared with rating agencies or investors.

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101.

The Trending Report contained the rejection and waiver rates for the loans that

were pooled into RMBS by Credit Suisse and sold to investors such as Plaintiff. Clayton found that of the Credit Suisse loans that Clayton reviewed for underwriting compliance, 32% neither met underwriting guidelines nor possessed compensating factors to justify an exception to be included into securitizations i.e., were Event 3s. However, Credit Suisse ignored many of these underwriting failures, waived 33% of those rejected loans back into its mortgage pools, and sold RMBS containing these non-compliant loans to investors such as Plaintiff ABP, as summarized in the following table: 1Q 2006 Initial Rejection rate Waiver rate 57% 33% 2Q 2006 33% 54% 3Q 2006 33% 42% 4Q 2006 31% 34% 1Q 2007 34% 20% 2Q 2007 26% 25% Total 32% 33%

102.

In its capacity as the underwriter for all of the Certificates purchased by Plaintiff,

Defendant Credit Suisse Securities had an obligation to conduct due diligence regarding the accuracy and completeness of the Offering Documents prior to their dissemination to investors such as ABP. In connection with that due diligence process, Credit Suisse Securities had access to various sources of information, including data from Clayton, which should have alerted it to the various originators systematic and widespread abandonment of stated underwriting guidelines and appraisal methods. Defendant Credit Suisse Securities was supposed to play a gatekeeper role for public investors such as Plaintiff, who did not have access to non-public information through which to test the assertions in the Offering Documents. Moreover, RMBS investors such as Plaintiff paid Credit Suisse Securities significant fees for carrying out this function.

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103.

It is evident, however, that Credit Suisse Securities did not fulfill its obligation to

ensure that investors such as ABP were provided Offering Documents containing accurate and complete information. For example, Ms. Beal told the FCIC in her prepared remarks, [t]o our knowledge, prospectuses do not refer to Clayton and its due diligence work. She further stated that Clayton does not participate in the securities sales process, nor does it have knowledge of our loan exception reports being provided to investors or the rating agencies as part of the securitization process. Additionally, D. Keith Johnson, the former President and Chief

Executive Officer of Clayton, confirmed to investigators that Claytons findings should have been disclosed to investors. By cynically ignoring the results of its due diligence and waiving loans that it knew to be defective into securitization pools, Credit Suisse Securities abandoned its gatekeeper role, willfully abdicating a responsibility it had been paid to assume. 104. While Credit Suisse ignored Claytons findings that a significant number of loans

it had originated through its own subsidiaries or purchased from third-party originators were flawed, and proceeded to bundle them into RMBS and sell them to investors such as Plaintiff, it did not ignore Claytons reports insofar as it could turn them to its own advantage. As Ms. Beal testified, Claytons clients used Claytons due diligence to negotiate better prices on pools of loans they [we]re considering for purchase, and negotiate expanded representations and warranties in purchase and sale agreements from sellers. These savings were not, however, passed on to investors such as ABP. 2. 105. Credit Suisse Knew Of Underwriting Failures Through Its Repricing Activities

In addition to the data it received from Clayton, Credit Suisse also maintained a

claims program through which it learned of underwriting failures on the part of third-party originators from which it acquired mortgage loans. Credit Suisse maintained a Put Back

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System database that it used to monitor loan performance and delinquency. When the system identified a loan that experienced an early default or another breach of the sellers representations and warranties, Credit Suisse would demand that the third-party originator that had sold it that loan provide compensation. For example, MBIA identified a December 2007 transaction in which Credit Suisse demanded that the third-party originator Decision One Mortgage Company, LLC (Decision One) provide compensation because a particular statedincome loan with a 100% LTV ratio was not documented according to the applicable underwriting guidelines.3 Credit Suisse also asserted claims against third-party originators for reasons such as failure to comply with underwriting guidelines, income and occupancy misstatements, possible mortgage fraud, and EPDs. 106. Although Credit Suisse identified many loans with EPDs or other major faults and

demanded compensation from the third-party originators who had sold them, Credit Suisse did not remove those loans from the securitization pools, pass its recoveries on to the Issuing Trusts that owned them, or even notify RMBS investors such as Plaintiff. Instead, Credit Suisse employed a strategy known as repricing whereby it would sell securitized loans back to the third party originators while simultaneously buying them back at a much lower price, based upon the defects that Credit Suisse had identified. Through this bookkeeping exercise, Credit Suisse demanded and received compensation for the flaws in securitized mortgage loans that it had already sold to investors such as Plaintiff, without passing along those savings. 107. MBIA identified a September 2007 repricing transaction with Decision One

whereby Credit Suisse sold Decision One seventeen defective loans that Decision One had originated sixteen of which were owned by an Issuing Trust for approximately $1.3 million,

Decision One originated loans in the HEAT 2006-6 offering purchased by ABP.

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and simultaneously bought the same loans back for approximately $215,000, bringing Credit Suisse a quick profit of more than $1 million. However, Credit Suisse did not remit its net gain to the Issuing Trust that actually owned the vast majority of the loans involved. Instead, the money was deposited in a Credit Suisse trading account. 108. Another deceptive strategy employed by Credit Suisse involved reaching

settlement agreements with third-party originators. In such agreements, Credit Suisse would agree to waive its right to make a third-party originator repurchase defective securitized loans in exchange for cash consideration. For example, MBIA identified a January 2009 settlement in which DLJ obtained $2.5 million for releasing Decision One of its obligation to repurchase defective loans. Again, this consideration went directly into Credit Suisse accounts and was not passed on to the appropriate Issuing Trusts or RMBS investors. 109. In a January 2007 email chain produced in connection with the MBIA litigation,

Credit Suisse Managing Director Peter Sack wrote to Credit Suisse Chief Credit Risk Officer Robert Sacco, [Put-Back Group]s December year-to-date report describes 900 loans that were repurchased from securities in 2006. However, I researched the loans and found that about 350 were not actually repurchased from deals we recd a check from the originator based on [repricing] but we did not repurchase the loan from the deal or pass the $ to the trust. 110. Thus, while Credit Suisse was assuring RMBS investors that the third-party

originators it dealt with followed the underwriting guidelines described in the Offering Documents, it was also collecting millions of dollars from those same third-party originators for selling it hundreds of loans that defaulted within just a few months or were otherwise seriously flawed. It is therefore beyond contention that Credit Suisse was aware of the true quality of the loans the third-party originators were producing.

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3. 111.

Credit Suisse Knew Of Underwriting Failures Through Its Servicing Activities

Even after its RMBS had been issued and sold to investors, Credit Suisse

continued to profit by collecting fees for servicing. Servicing involves collecting mortgage payments, remitting those payments to the Issuing Trusts for distribution to investors, contacting delinquent borrowers, and foreclosing on defaulted properties. In August 2005, Credit Suisse purchased the subprime mortgage servicing company Defendant SPS. 112. Servicing securitized mortgages was a major source of revenue for Credit Suisse.

According to Credit Suisse Groups Form 20-F Annual and Transition Report, filed on March 20, 2008, the fair value of the Credit Suisse Groups mortgage servicing rights was 179 million Swiss francs (approximately $162 million) as of December 31, 2007. 113. Because servicers are in regular, direct contact with borrowers, they are in a

unique position to evaluate the likelihood that loans will be repaid. The Prospectus Supplement for the HEAT 2006-7 Trust states that: The servicing of [Alt-A, subprime, and non-performing] assets requires a high level of experience and sophistication and involves substantial interaction with customers. This is particularly true when a customer is experiencing financial difficulty or when a loan has become delinquent. In such cases, SPS works with customers individually, encouraging them to make payments timely, working on missed payments, and structuring individual solutions when appropriate. In connection with delinquent mortgage loans, the quality of contact is critical to the successful resolution of the customers delinquency. 114. Because servicing involves property value assessment, servicers are also in a

unique position to detect inflated appraisal values. The Prospectus Supplement for the HEAT 2006-7 Trust, for example, states that: In connection with handling delinquencies, losses, bankruptcies and recoveries, SPS has developed a sophisticated model, based upon updated property values, for projecting the anticipated net 41

recovery on each asset. Property valuations are generally ordered starting at the 63rd day of the default recovery process of the delinquent loan and then no more frequently than every six (6) months. The projected net present value is part of SPSs proprietary loss mitigation automation and assists staff with determining an appropriate and reasonable strategy to resolve each defaulted loan on the basis of the information then available. 115. SPS was the servicer for many of the loans underlying the RMBS purchased by

Plaintiff. For example, the Prospectus Supplement for the HEAT 2006-7 Trust states that SPS would be the servicer for 95% of the pooled loans. Through its ownership of SPS, Credit Suisse had an incentive to wrongfully misrepresent the viability of loans that should have been foreclosed or liquidated, and did so, at the expense of investors such as ABP, in order to collect late payment fees and service charges on the servicing of those loans. 116. As a result of the insight into the true quality of the loans that it had securitized

and the likelihood of a collapse in the subprime industry gained from its servicing activities, Credit Suisse increased its efforts to offload its mortgage portfolio onto investors such as Plaintiff. David Mathers, an executive in Credit Suisses investment bank operations, told EUROMONEY that, [Credit Suisse] had our first conversations about scaling back our subprime origination in 2006. We had a subprime servicer and saw signs of strain in the market. Market events in the first quarter of 2007 added to our concerns and we both accelerated our position reduction efforts and looked at specific hedging initiatives. Credit Suisse did not pass on the information it obtained from its servicing activities to its RMBS investors. 117. In addition, Credit Suisse has faced regulatory action for not accurately reporting

servicing data to investors. On May 26, 2011, the Financial Industry Regulation Authority (FINRA) announced that Defendant Credit Suisse Securities had submitted a Letter of Acceptance, Waiver and Consent (AWC) and agreed to a censure and fine of $4.5 million for

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the inaccurate reporting of delinquency data related to the issuance of subprime securities. Specifically, FINRA found that Credit Suisse had failed to provide accurate delinquency rates with respect to 21 subprime securitizations that were referenced on the Companys website in 2006. The AWC described how Credit Suisse had been informed by one of its master servicers in November 2006 about the inaccurate delinquency rates and that, as a result, the inaccuracies had the capacity to seriously impact investors assessment of future securitizations. FINRA found that, although Credit Suisse knew of the inaccuracies, it did not sufficiently investigate the delinquency errors, inform clients who had invested in the securitizations at issue of the specific reporting discrepancies, or correct the information on the website. As a result, investors who were evaluating the securities for potential purchase were unaware that some of the delinquency information referenced on the website was inaccurate. The website also hyperlinked inaccurate information for six of the 21 securitizations to four subsequent RMBS securitizations, resulting in further impairment of investors ability to evaluate the true risks involved in making future purchases. Plaintiff ABP purchased from two of the six affected securitizations, including HEAT 2006-5 and HEAT 2006-6, and was affected in its purchase from one of the four subsequent securitizations impacted by the inaccurate information, including HEAT 2006-8. C. 118. CREDIT SUISSE KNEW OF DECLINING UNDERWRITING STANDARDS THROUGH ITS MONITORING OF THE HOUSING MARKET Credit Suisse maintained a sophisticated research operation, which conducted in-

depth monitoring and analysis of the housing industry for, inter alia, issuing recommendations on the stock of homebuilding companies. Credit Suisse housing analysts and RMBS personnel worked closely together to obtain an accurate picture of the market. Through these research and monitoring activities, Credit Suisse learned of the widespread collapse of lending and underwriting standards on the part of mortgage originators, the flaws inherent in exotic mortgage

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products, and pervasive fraud in appraisals and low-documentation lending programs.

Its

analysts alerted Credit Suisse to declining lending standards as early as 2003. Credit Suisse nonetheless continued to originate, purchase, securitize, and sell mortgage loans suffering from exactly the problems that its own research had identified. 119. On March 12, 2007, Credit Suisses Equity Research department released a report

entitled, Mortgage Liquidity du Jour: Underestimated No More (the Mortgage Liquidity Report). This report, which was not made widely available or provided to RMBS investors such as ABP, set forth a comprehensive analysis of the housing and mortgage markets, based on data assembled by Credit Suisse housing analysts and a survey of private homebuilders and mortgage lenders. Credit Suisses Asset-Backed Securities Team and Mortgage Backed

Securities Team both contributed to the preparation of the Mortgage Liquidity Report. The Mortgage Liquidity Report contains many statements clearly demonstrating Credit Suisses knowledge of declining underwriting standards, such as: [W]e believe that there is considerable risk associated with the lax underwriting standards and exotic mortgage products utilized in [the AltA] segment of the market in recent years, both in the form of continued credit deterioration and reduced incremental demand resulting from tightening lending standards. While prime conforming conventional loans are still considered to be the safest credit risk, underwriting standards on these loans appeared to have eased in recent years, in-step with the broader mortgage market. Despite the easing underwriting criteria delinquency rates on subprime loans remained at historically low levels throughout most of 2004 and 2005, as record home price appreciation provided marginal quality buyers with a buffer of equity used to either refinance into a more affordable mortgage or sell the home at a nice profit upon rate reset. This undoubtedly fueled even further easing of underwriting standards and growth in the subprime market. As new subprime lenders continued to pop up on a daily basis throughout the housing boom, underwriters continued to loosen lending standards in

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an effort to gain market share; the effects of which are coming back to haunt the loan originators today in the form of early payment defaults. 120. One especially risky underwriting practice identified by Credit Suisse involved

lenders offering adjustable rate mortgages (ARMs) or negative amortization mortgages to borrowers who did not understand these complex products.4 Although originators had an

obligation to ensure that borrowers had income sufficient to pay their mortgages, some borrowers were qualified for these loans based only on the initial, or teaser mortgage rates, and thus found themselves unable to meet their payment obligations once the rates reset to a higher level. The Mortgage Liquidity Report states that many buyers were qualified for these loans only with regard to the teaser rates and that, In our opinion, however, a more problematic group of homebuyers that have utilized the interest-only or neg-am options have been those that have used the initial monthly payments in order to qualify for a home above their means (or any home in general.) 121. Some of the loans underlying Credit Suisse RMBS were generated pursuant to

stated income and low documentation programs. However, the Mortgage Liquidity Report demonstrates Credit Suisses knowledge that such programs were rife with fraud, and that many such borrowers exaggerated their incomes so as to qualify for loans that they could not afford. Low/no documentation loans increased from just 18% of total purchase originations in 2001 to 49% in 2006 according to Loan PerformanceWhile many believe that buyers choose to provide limited or no documentation for convenience a study by the Mortgage Asset Research Institute sampling 100 stated income (low/no documentation) loans found that 60% of borrowers had exaggerated their income by more than 50%.

Adjustable rate mortgages initially charge a low, teaser interest rate, which adjusts upwards after an initial period. Negative amortization mortgages allow borrowers to pay no principal costs and less in monthly payments than their interest costs, resulting in an increasing mortgage balance over time.

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[L]ow/no documentation loans (stated income loans) represented a staggering 81% of total Alt-A purchase originations in 2006, up significantly from 64% just two years earlier. These loans are also sheepishly referred to as liar loans by many in the industry due to the propensity for borrowers to exaggerate their income on loan applications. In the past five years, subprime purchase originations have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. Loans were made to first time homebuyers with little or no down payments, as 2006 subprime purchase originations posted an alarming 94% combined loan-to-value, on an average loan price of nearly $200,000. Even more distressing is the fact that roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes.

122.

Based in large part on the low underwriting standards, documentation failures and

proliferation of exotic mortgage products that Credit Suisse had identified in the mortgage market, the Mortgage Liquidity Report accurately predicted a rising tide of delinquencies and foreclosures, stating that: Given the easing underwriting standards seen throughout the subprime and Alt-A markets in recent years (i.e. lower documentation requirements, less money down, proliferation of exotics), it should not be overly surprising to see escalating delinquency rates on these products now that home price appreciation has dissipated across most of the country. While we will defer any future performance outlook of these loans to credit analysts, we do not envision any immediate recovery given the poor underwriting in recent years, and persistent pressure on home prices due to aggressive builder incentives, rising resale inventories and escalating foreclosures. 123. The Mortgage Liquidity Report also contained discussion of appraisal fraud and

originators distortion of LTV values, as discussed in Section VII, infra. 124. Credit Suisses housing market research operations uncovered facts that were

critical to Credit Suisses RMBS activities. Credit Suisse personnel responsible for mortgagebacked securitizations participated in and contributed to this research, and were thus aware of its

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findings. Although Credit Suisse was aware of dangerously low underwriting standards in the mortgage industry, it did not share its knowledge with RMBS investors such as ABP. D. 125. DEFENDANTS CREDIT SUISSE GROUP, CREDIT SUISSE USA AND CREDIT SUISSE HOLDINGS CONTROLLED THE CREDIT SUISSE SECURITIZATION PROCESS Defendant Credit Suisse Group was at the very top of the Credit Suisse vertically

integrated corporate structure. As such, Credit Suisse Group was in a position to and in fact controlled each of Defendants CSAG, ABS; Credit Suisse USA; Credit Suisse Holdings; CSFB Mortgage; Credit Suisse Securities; CSFC; DLJ; and SPS. Defendant Credit Suisse Group operated its consolidated subsidiaries as a collective enterprise, making significant strategic decisions for its subsidiaries, monitoring enterprise-wide risk, and maximizing profit for Credit Suisse Group. 126. In its SEC filings, Credit Suisse Group discussed its practice of securitizing loans

by acting through its subsidiaries. For example, Credit Suisse Groups Form 20-F Annual and Transition Report, filed on March 20, 2008 for the period ending December 31, 2007, states, inter alia, that: We finance and acquire principal positions in a number of real estate and real estate-related products, both for our own account and for major participants in the commercial and residential real estate markets, and originate loans, including subprime loans, secured by commercial and residential properties. We also securitize and trade in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages, and other real estate and commercial assets and products, including residential and commercial mortgage-backed securities. ***** The majority of [Credit Suisse Group]s securitization activities involve mortgages and mortgage-related securities and are predominantly transacted using QSPEs [Qualified Special Purpose Entities].These QSPEs issue commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), and asset-backed securities (ABS), that are collateralized by the assets transferred to the QSPE and that pay a

47

return based on the returns on those assets ... [Credit Suisse Group] is an underwriter of, and makes a market in, these securities. ***** Structured products trades, originates, securitizes, syndicates, underwrites, and provides research for all forms of securities that are based on underlying pools of assets, including commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS), collateralized debt obligations (CDO) and other asset-backed securities (ABS).

127.

Credit Suisse Group culpably participated in the violations of its subsidiaries

discussed above. Credit Suisse Group approved the manner in which it sold the loans it elected to securitize and controlled the disclosures made in connection with those securitizations. Among other misconduct, Credit Suisse Group oversaw the actions of its subsidiaries, including Defendants CSAG, ABS, Credit Suisse Securities, CSFB Mortgage, and DLJ, and allowed them to misrepresent the mortgage loans characteristics in the Offering Documents. 128. Defendant CSAG is an entity through which Credit Suisse Group, which had the

same Board of Directors and Executive Board as CSAG, exercised control over its U.S. subsidiaries and U.S. securitization activities. Defendant CSAG controlled each of its

subsidiaries Defendants ABS; Credit Suisse USA; Credit Suisse Holdings; CSFB Mortgage; Credit Suisse Securities; CSFC; DLJ; and SPS. CSAG operated its consolidated subsidiaries as a collective enterprise, making significant strategic decisions for its subsidiaries, monitoring enterprise-wide risk, and maximizing profit for its parent corporation, Credit Suisse Group. CSAG also exercised control over its subsidiaries by providing them with funds so as to capitalize on opportunities identified by management. 129. CSAG culpably participated in the violations of its subsidiaries discussed below.

CSAG approved the manner in which it sold the loans it elected to securitize and controlled the disclosures made in connection with those securitizations. Among other misconduct, CSAG 48

oversaw the actions of its subsidiaries and allowed them, including Defendants ABS, Credit Suisse Securities, and CSFB Mortgage, to misrepresent the mortgage loans characteristics in the Offering Documents. 130. Defendant Credit Suisse USA was an entity through which Credit Suisse Group

exercised control over its U.S. subsidiaries and U.S. securitization activities. As discussed below, the majority of the officers of the Issuing Defendants ABS and CSFB Mortgage were also employees of Credit Suisse USA. Through these executives, Credit Suisse USA exercised control over its affiliates. Defendant Credit Suisse USA was in a position to and in fact

controlled each of Defendants ABS; CSFB Mortgage; Credit Suisse Securities; CSFC; DLJ; and SPS. 131. Like Credit Suisse Group, Credit Suisse USA discussed its practice of securitizing

loans by acting through its subsidiaries and affiliated Credit Suisse entities in its SEC filings. For example, Credit Suisse USAs Form 10-Q, filed on November 14, 2006 for the period ending September 30, 2006, states, inter alia, that: We originate commercial mortgages and originate and purchase residential mortgages and sell these assets directly or through affiliates to special purpose entities that are, in most cases, qualified special purpose entities, or QSPEs. These QSPEs issue securities that are backed by the assets transferred to the QSPEs and pay a return based on the returns on those assets ... These QSPEs are generally sponsored by our subsidiaries. Our principal broker-dealer subsidiary, [Credit Suisse Securities], underwrites and makes markets in these mortgage-backed and asset-backed securities. ***** The Company originates and purchases residential mortgages and originates commercial loans for the purpose of securitization. The Company sells these mortgage loans to securitization trusts[.] ***** The following table presents the proceeds and gains related to the securitization of commercial mortgage loans, residential mortgage loans 49

and other asset-backed loans for the nine months ended September 30, 2006 and 2005. The gain on securitizations includes underwriting revenues, deferred origination fees and expenses, gains or losses on the sale of the collateral to the QSPE or VIE and gains or losses on the sale of the newly issued securities to third parties[.] 132. Credit Suisse USA culpably participated in the violations of its affiliates and its

subsidiary, Credit Suisse Securities, discussed below. Credit Suisse USA approved the manner in which its affiliates sold the loans they elected to securitize and controlled the disclosures made in connection with those securitizations. Among other misconduct, Credit Suisse USA oversaw the actions of its subsidiaries and affiliates, including Defendants ABS, Credit Suisse Securities, and CSFB Mortgage, and allowed them to misrepresent the mortgage loans characteristics in the Offering Documents. 133. Defendant Credit Suisse Holdings was another entity through which Credit Suisse

Group exercised control over its U.S. subsidiaries and U.S. securitization activities. Defendant Credit Suisse Holdings controlled Defendants ABS; CSFB Mortgage; Credit Suisse USA; Credit Suisse Securities; CSFC; DLJ; and SPS, each of them a wholly-owned subsidiary of Credit Suisse Holdings. Among other misconduct, Credit Suisse Holdings oversaw the actions of its subsidiaries, including Defendants ABS, Credit Suisse Securities, and CSFB Mortgage, and allowed them to misrepresent the mortgage loans characteristics in the Offering Documents. V. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS UNDERLYING PLAINTIFFS CERTIFICATES WERE MADE AS A RESULT OF THE SYSTEMATIC ABANDONMENT OF PRUDENT UNDERWRITING GUIDELINES AND STANDARDS 134. Contrary to the representations in the Offering Documents, the mortgage loans

underlying Plaintiffs Certificates not only did not comply with the underwriting standards as represented, but these standards were knowingly and systemically ignored by Credit Suisse in

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order to achieve its goal of originating and securitizing as many loans as possible in order to maximize its fees. 135. As represented in the Offering Documents, Defendants underwriting guidelines

were primarily intended to assess the ability and willingness of the borrower to repay the mortgage loan, apart from the adequacy of the mortgaged property as collateral for the loan. Accordingly, the underwriting guidelines required the consideration of, among other things, the borrowers assets, liabilities, income, employment history and credit history. These items of information were used to calculate the borrowers debt-to-income ratio. 136. Notwithstanding these explicit requirements in their underwriting guidelines, the

originators extended numerous loans even though the borrowers information did not qualify them for the requested loan, was not provided, or even if it was, where that information was patently false and the underwriters knew that the borrower was misrepresenting her or his income, occupation and other information, and was engaged in outright mortgage fraud. 137. Because Credit Suisse operated a vertically integrated mortgage securitization

business, with subsidiaries involved in every step of the process from originating loans, pooling the loans it had originated through its own subsidiaries or purchased from third-party originators, underwriting and conducting due diligence on RMBS offerings, and servicing pooled loans, it knew that originators that it owned or did business with were not adhering to their underwriting standards, or was reckless for not so knowing. A. 138. DEFENDANTS CSFC AND DLJ ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS The majority of the mortgage loans underlying the CSAB 2006-3 Trust were

originated by Credit Suisse subsidiaries CSFC and DLJ, and no more than 10 percent were issued by any other single originator. These loans were generated as part of Credit Suisses

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vertical integration strategy specifically so that they could be securitized and sold to investors such as Plaintiff. As Credit Suisse USA stated in its Form 10-Q filed on November 14, 2006, The Company originates and purchases residential mortgages and originates commercial loans for the purpose of securitization. As such, Credit Suisse set lending and underwriting

standards at these entities with an eye towards selling the loans, and any accompanying risk, into the RMBS market. 139. Defendants CSFC and DLJ originated a majority of the underlying mortgages

pooled into the CSAB 2006-3 securitization purchased by Plaintiff. As discussed in 82-91, supra, these companies routinely and systematically disregarded their own underwriting guidelines in order to ramp up loan originations for Credit Suisse securitizations, and extended loans to borrowers who were unqualified and had little ability to repay the loans. 140. For example, as noted in 308, infra, the CSAB 2006-3 Trust has performed

worse than almost any of the other Credit Suisse RMBS purchased by Plaintiff, with a shocking 42.14% delinquency rate and a 28.49% foreclosure rate, and has been downgraded to junk status by both S&P and Moodys. It is now clear that the securitizations over which Credit Suisse had the most influence and control, and which were based primarily on loans generated by Credit Suisse subsidiaries, were comprised of some of the riskiest and least rigorously underwritten loan pools. B. THE THIRD-PARTY ORIGINATORS OF THE MORTGAGE LOANS UNDERLYING PLAINTIFFS CERTIFICATES ABANDONED THEIR UNDERWRITING GUIDELINES AND APPRAISAL STANDARDS As discussed above, many of the underlying mortgage loans that the Defendants

141.

packaged into the securities sold to Plaintiff were originated by third-party institutions and then sold to Defendants ABS or CSFB Mortgage. The Offering Documents associated with each of Plaintiffs Certificates purported to describe each of the specific originators underwriting 52

guidelines, and represented that the underlying mortgage loans were originated in compliance with the underwriting and appraisal standards of the originators and in accordance with Credit Suisses underwriting guidelines. 142. Several of the relevant originators involved in these transactions are now known

to have, among other things, ignored their own underwriting guidelines and used inflated appraisals during loan generation. The questionable practices that were employed by many of these originators have led to numerous allegations and investigations into their operations. In fact, as noted below, faulty underwriting has led to the downfall of several of the originators whose loans Defendants bundled in these offerings. 143. In addition, Defendants received due diligence on the mortgage loans they

acquired from third parties which should have enabled them to ensure that faulty mortgages were not included in the Certificates they underwrote and sold. See 98-102, supra. 144. As set forth above, Defendants were aware of a collapse in underwriting standards

on the part of the originators with whom they did business, including widespread failure to abide by stated underwriting guidelines, permitting sales personnel and management to routinely override underwriting decisions, pressuring appraisers to artificially inflate the values of mortgaged properties, and making no efforts to verify the income of borrowers. Defendants were also aware that, as a result of the Originators fraudulent appraisal practices, which made the borrowers appear to have more collateral than they actually did, the LTV values of the loans were inflated. However, rather than putting an end to these corrupt practices or refusing to purchase these defective loans, Defendants urged the originators to make more and riskier loans.

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145.

The third party originators of the mortgage loans underlying the Certificates that

departed from stated underwriting guidelines with respect to the mortgages underlying Plaintiffs Certificates included, but are not limited to the following: 1. 146. Accredited Home Lenders Inc.

Accredited Home Lenders Inc. (Accredited) was an originator of loans that

were packaged into RMBS and purchased by ABP, including HEAT 2006-7 and HEAT 2006-8. Accredited was a mortgage banking company that operated throughout the United States and Canada, originating loans through a network of mortgage brokers and a retail unit. Accredited expanded at a rapid pace as the subprime mortgage industry boomed, and the total volume of loans the company originated increased from $1.5 billion in 2000 to $12.4 billion in 2004, increasing even further through 2006. 147. Accredited achieved this breakneck pace of growth in large part by discarding its One witness, a corporate underwriter who worked at Accredited

underwriting standards.

between June 2004 and March 2005, described how underwriting decisions were frequently overridden by managers on the sales side of the business. The witness noted that such loans were tracked internally, and it was well-known they performed poorly. Moreover, according to the witness, by no later than the early part of 2005, Accredited was approving risky loans that did not comply with its own underwriting guidelines in an effort to reach monthly production targets. Another witness, a corporate underwriter who worked at Accredited in Tampa, Florida between August 2003 and February 2006, described how Operations Managers and Senior Operations Managers constantly overrode decisions to reject loan applications. 148. Another former Accredited corporate underwriter claimed that the rejection of a

risky loan was often subject to an override. The former employee stated, [t]he overrides were rampant, especially during the last few days of each month when they wanted to ramp up 54

production. He continued, If the borrower breathed, he got the loan. The former Accredited Chief Appraiser stated that by June 2006, between 12% and 15% of [Accrediteds] business was being done through management overrides. 149. Not surprisingly, on May 1, 2009, Accredited filed for bankruptcy. Accredited

faced huge demands from banks that purchased loans from Accredited to repurchase the loans based on the discovery of various defects in the loans. In bankruptcy filings, Accredited stated that it faced more than $200 million in repurchase claims. 2. 150. Aegis Mortgage Corporation

Aegis Mortgage Corporation (Aegis) was another originator of mortgage loans

that were pooled into RMBS and purchased by ABP, including HEAT 2007-1. Aegis started as a privately held mortgage banking company owned by three individuals. By 1998, the company was generating $1 billion in annual loan volume. In 1998 and 1999, Cerberus Capital

Management, LP (Cerberus) made a $45 million investment in Aegis. With this cash, Aegis acquired two extremely distressed mortgage production operations, UC Lending and New America Financial. These and subsequent acquisitions enabled Aegis to grow from 150

employees in nine locations in 1999 to 3,800 employees in over 100 locations in 2005. By 2006, Aegis was ranked as the 13th largest subprime lender in the country, generating close to $20 billion in annual originations. In eight years, the companys subprime originations grew by an incredible 1,750%. 151. Aegis astronomic growth was fueled by an insatiable appetite for high fee, high-

risk mortgages. In late 2006, the company couldnt issue mortgages fast enough for the Wall Street machine that used them to create high-risk, very profitable bonds. Katie Benner, The Darker Side of Buyout Firms, FORTUNE, Aug. 20, 2007. To satisfy its enormous appetite, Aegis loosened its loan underwriting standards to the point of near abandonment by 2006. A large 55

portion of the loans Aegis originated during this time were in fact purchased from unlicensed mortgage brokers. Because Aegis was selling all the loans it originated to investment banks like Credit Suisse for securitization, underwriting standards were thrown by the wayside. Quantity became more important than quality, as guidelines were consistently ignored and more and more loans approved. 152. Eventually, the bad loans caught up with Aegis. A news report issued on August

6, 2007, announced that Aegis could not meet all of its existing funding obligations. Alistair Blair, Aegis Mortgage Suspends All Loan Originations, MARKET WATCH, Aug. 6, 2007. On August 13, 2007, the company was forced to file for bankruptcy protection. Jonathan Stempel, Aegis Mortgage Files for Chapter 11 Bankruptcy, REUTERS, Aug. 13, 2007. 153. In November of 2008, the Office of the Comptroller of the Currency (OCC)

compiled an analysis of the ten mortgage originators with the highest rate of non-performing subprime and Alt-A loans, originated from 2005 to 2007, in the ten U.S. metropolitan areas with the highest foreclosure rates in the first half of 2008. This report was titled Worst Ten in the Worst Ten. Alarmingly, only 21 mortgage originators, in various combinations, occupied the Worst Ten slots in the Worst Ten metropolitan areas with the highest foreclosure rates. Aegis was named one of the Worst Ten in this report. By the first half of 2008, 2,058 subprime or Alt-A mortgage loans originated by Aegis, in the ten metropolitan areas hardest-hit by foreclosures, were already in foreclosure. 3. 154. Ameriquest Mortgage Company

Ameriquest Mortgage Company (Ameriquest) also originated mortgage loans

that were pooled into securitizations and purchased by ABP, including ABSC 2007-HE2, ABSC 2006-HE6 and ABSC 2006-HE7. Ameriquest was a wholly-owned retail lending subsidiary of ACC Capital Holdings Corporation (ACC Capital), the nations largest subprime lender, as 56

well as an affiliate of Argent Mortgage Company, LLC, another third-party originator discussed below. 155. At one time the nations largest subprime mortgage lender, Ameriquests apparent

success in the subprime lending market was characterized by the companys complete abandonment of prudent underwriting guidelines. As revealed by a multi-state investigation, Ameriquest made stated income or low documentation loans where Ameriquest employees fabricated or inflated the borrowers income and/or assets in order to qualify the borrowers for the loans. 156. Former Ameriquest employees have spoken out regarding Ameriquests business

practices. A NATIONAL PUBLIC RADIO newscast from May 14, 2007, described how employees were encouraged to conceal rate terms and to make fake fixed-loan documents pushing customers into loans that they could not afford. One former Ameriquest employee, Tyson Russum, stated that the impression [he] got was that its basically make the sale at any cost. Russum, a loan officer who worked in Tampa, Florida, recalled observing some co-workers applying white-out to income numbers on W-2s and bank statements and filling in bigger amounts basically to qualify people for loans that they couldnt afford, a practice that was referred to as taking the loan to the art department. Such practices were not isolated incidents but rather occurred at Ameriquest branches across the country. 157. An August 20, 2007, BUSINESSWEEK article entitled Did Big Lenders Cross the

Line? reported the emergence of a growing number of lawsuits pertaining to subprime mortgage lending, suggesting that some big lenders, like Ameriquest, had been colluding to falsify loan documents by beefing up income and lowballing outstanding debts in an effort to keep up loan volume and generate sales.

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158.

The article described one such lawsuit filed by Mary Overton.

Overtons

complaint alleged that loan officers at a Brooklyn, New York, branch of Ameriquest coerced [her] into signing a loan, but [u]nbeknownst to Ms. Overton, Ameriquest created fake tax returns, employment records, and a 401(k)to make it appear that the loan was affordable. The article reported that at least 40 other borrowers alleged that Ameriquest doctored loan documents or increased borrowers income in an effort to boost loan generation and sales. 159. According to written testimony provided in March 2009 by Illinois Attorney

General Lisa Madigan to the House Committee on Financial Services: Ameriquest [] received its funding line from Wall Street firms. These same firms bought and securitized the subprime loans Ameriquest sold. For those of us on the state level, the Ameriquest investigation marks the moment when we began to see the underwriting practices of mortgage lenders erode at a disturbingly accelerated pace. In 2002, Ameriquest was originating loans with an average loan-to-value ratio of 74 percent. Two years later, the ratio had risen to 81 percent. Ameriquest had also ramped up its originations of stated income loans, that is, loans that permit the borrower merely to state his or her income without further review. By 2003, Ameriquest was originating almost 30 percent of its loans which were all subprime as stated-income or limiteddocumentation loans. Our multistate investigation of the nations largest subprime mortgage lender revealed that Ameriquest engaged in the kinds of fraudulent practices that other predatory lenders subsequently emulated on a wide scale. These practices included: inflating home appraisals Ameriquest also locked borrowers into costly loans by including three-year prepayment penalties on loans with a two-year introductory rate that reset to a higher rate at the end of two years. [T]hese penalties were added because Wall Street investors preferred and paid more for loans with prepayment penalties. 160. Ameriquest entered into a nationwide settlement in 2006 under which it agreed to

injunctive relief and monetary payments totaling $325 million. Among other things, Ameriquest agreed to use independent loan closers for all subprime loans, to ensure that each loan provided

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an actual benefit to the borrower, and not to fabricate or inflate income or assets or sign any documents on behalf of a borrower. 161. In October 2007, Wachovia Bank N.A. (Wachovia) filed a lawsuit against

Ameriquest for failure to comply with repurchase requests on loans with fraudulent files. Wachovia paid Ameriquest almost $129 million for loans purchased on December 29, 2005, but later identified at least 135 loans that Ameriquest misrepresented, including loans with documentation containing incorrect credit scores, false employment status and misstatements of the kind of home being financed. 162. A class action complaint was also filed in the United States District Court for the

Northern District of Illinois in December 2005 against Ameriquest, its sister company Argent, and parent ACC Holdings, which was later consolidated along with 14 other class action cases before the Judicial Panel on Multidistrict Litigation (the MDL Panel). The complaint alleged that Ameriquest violated numerous federal and state laws, including TILA, breach of contract, unjust enrichment, and state Consumer Protection and Deceptive Trade Practices Acts, by engaging in a uniform common plan and scheme to prey upon unsuspecting consumers by routinely causing borrowers to enter into residential loans with unfavorable terms, misleading and inappropriate discount fees, high and adjustable interest rates, prepayment penalties, and excessive loan principal compared to equity and ability to pay. 163. In January 2010, Ameriquest and its affiliate defendants participated in a $22

million settlement of these claims. 4. 164. Argent Mortgage Company, LLC

Argent Mortgage Company, LLC (Argent) also originated loans packaged into

RMBS and purchased by ABP, including ABSC 2007-HE2, ABSC 2006-HE6 and ABSC 2006-

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HE7. Argent was incorporated in 2001 and was a wholly-owned subsidiary of ACC Capital, operating as one of the nations largest subprime lenders. 165. Argents success in the mortgage-lending market was attributable to its loan

originations using fraudulent loan applications and its departure from sound underwriting practices. In 2005, the Florida Attorney General initiated an investigation against Argent after numerous complaints alerted the office that Argent was providing mortgages to homeowners for home repair projects using fraudulent documents and loan applications. Investigators discovered nearly 130 loans funding nearly $13 million that were approved based on fraudulent applications. As a result of these investigations, Argents former vice president Orson Benn was sentenced to 18 years in prison in September 2008, for racketeering, mortgage fraud and grand theft. 166. According to a December 7, 2008, article describing its investigation into

Argents dismal lending practices, the MIAMI HERALD discovered that several former Argent employees engaged in mortgage fraud, including Benn, who actively assisted mortgage brokers in falsifying borrowers financial information by tutoring mortgage brokers in the art of fraud. Benn himself stated that the accuracy of loan applications was not a priority, but rather, the company made money by bundling mortgages and selling them to investors on Wall Street. To increase the flow of loans generated, Benn taught brokers to prepare phony income statements and doctor credit reports. 167. During the course of its investigation, the MIAMI HERALD obtained every loan

application generated by one Argent broker between May 2004 and September 2005. In a December 7, 2008 article, the paper revealed that out of 129 applications, 103 contained red flags, such as non-existent employers, grossly inflated salaries and sudden, drastic increases in the borrowers net worth. The article stated that the simplest way for a bank to confirm

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someones income is to call the employer. But in at least two dozen cases, the applications show[ed] bogus telephone numbers for work references. Argents verification process was so deficient that a borrower [who] claimed to work a job that didnt exist got enough money to buy four houses. Another borrower claimed to work for a company that didnt exist and got a $170,000 loan. 168. The CLEVELAND PLAIN DEALER also reported in a May 11, 2008, article that

industry leaders believed that lower-echelon employees of companies like Argent actively participated in fraud. For example, Jacqulyn Fishwick, who worked for over two years as an underwriter and account manager at an Argent loan-processing center near Chicago, had personally seen some stuff [she] didnt agree with and witnessed some Argent employees who played fast and loose with the rules. Fishwick also saw [Argent] account managers remove documents from files and create documents by cutting and pasting them. 169. In April 2010, the FCIC heard testimony from several former Citigroup

executives as part of the FCICs investigation regarding the causes of the subprime lending meltdown. Richard Bowen, Citigroups former chief underwriter for CitiMortgage, told the FCIC panel in his April 7, 2010, testimony that warned management of the companys mortgage risk beginning in 2006 when he discovered that more than 60% of the mortgages being bought and sold by Argent were defective; advice apparently not heeded, since Citigroup acquired Argent in 2007. 5. 170. Decision One Mortgage Company, LLC

Decision One Mortgage Company, LLC (Decision One) also originated

mortgage loans purchased by ABP, including HEAT 2006-6 and HEAT 2006-8. Decision One, which was acquired by HSBC Finance Corp. (HSBC) in March 2003, operated as a wholesale

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lender in the area of non-conforming residential loans and specialized in catering to borrowers with poor credit. 171. Decision One routinely ignored its underwriting guidelines in favor of cashing in

on increased loan originations. The company provided stated income loans to borrowers with risky credit histories and conducted little or no due diligence regarding the borrowers ability to repay the loans. Decision One also intentionally overstated borrowers income on loan

documentation in order to generate more loans. These unscrupulous lending practices eventually led to Decision Ones collapse. In September 2007, HSBC announced that it would be closing Decision One, resulting in an $880 million goodwill impairment and another $65 million in restructuring costs to HSBC. 172. Credit Suisse was aware of Decision Ones shoddy underwriting practices. On

multiple occasions, Credit Suisse demanded that Decision One provide compensation for selling Credit Suisse loans that did not conform to stated underwriting guidelines. The breaches were not minor. In one September 2007 transaction identified by MBIA, Credit Suisse demanded and received, through a sale and repurchase transaction, compensation for seventeen defective loans totaling approximately eighty four percent of the original purchase price. 173. Decision One has also faced numerous consumer lawsuits as a result of its

fraudulent and deceptive business practices. For example, in January 2009, an action was removed from San Diego Superior Court to the Southern District of California, claiming that Decision One engaged in predatory lending practices by knowingly providing loans to borrowers that drastically exceeded their monthly income. The plaintiff claimed that Decision One

fraudulently overstated her income in order to get the loan approved, disregarded sound underwriting criteria, required no documentation to support the information contained in the loan

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documentation, and conducted no due diligence regarding the plaintiffs income and employment status. The complaint also alleged that defendants gave risky loans to unqualified borrowers, often requiring little or no down payments for the loans. See Watts v. Decision One Mortgage Co., No. 09-cv-0043-JM-BLM (S.D. Cal. filed Jan. 12, 2009). A number of other Decision One borrowers have made similar charges against the company in connection with their own TILA suits. See, e.g., Bogdan v. Decision One Mortgage Co., No. 09-cv-01055-AWI-SMS (E.D. Cal. filed June 16, 2009); Kimura v. Decision One Mortgage Co., No. 09-cv-01970-GMN-GWF (D. Nev. filed Aug. 5, 2009); Monahan v. Decision One Mortgage Co., No. 10-cv-2078-H-RBB (S.D. Cal. filed Oct. 06, 2010); Rolfes v. Decision One Mortgage Co., No. 10-cv-00066-D (E.D.N.C. filed Dec. 22, 2010). 6. 174. Encore Credit Corp.

Encore Credit Corporation (Encore) originated mortgage loans pooled into

securitizations purchased by ABP, including HEAT 2006-5, HEAT 2006-6, HEAT 2006-7 and HEAT 2006-8. Encore, founded in 2002, was a mortgage lender specializing in subprime mortgage loans, originating over $2 billion in nonconforming loans during its first year of business. In May 2009, Encore was listed as number 17 on the Center for Public Integritys list of top 25 subprime lenders responsible for the subprime economic meltdown, based on over $22 billion in high-risk, high-interest loans that the company originated between 2005 and 2007. 175. Encore was a wholly-owned subsidiary of ECC Capital Corporation (ECC

Capital), a mortgage finance real estate investment trust (REIT) that originated and invested in residential mortgage loans. 176. Encore has faced a number of TILA lawsuits alleging a host of deceptive loan

origination practices. Allegations against Encore include predatory lending, failing disclose material terms of the loan, improperly inflating appraisals, forcing homebuyers to sign blank 63

loan documents, and altering documents without borrowers consent. See Lindsay v. Encore Credit Corp., No. 10-cv-2464-TWT (N.D. Ga. filed Aug. 6, 2010); Pieleanu v. Mortgage Elec. Reg. Sys., No. 08-cv-07404 (N.D. Ill. filed Dec 29, 2008); Smith v. Encore Credit Corp., No. 08cv-01462-DAP (N.D. Ohio filed June 17, 2008); Welch v. Countrywide Home Loans, No. 09-cv00168-LKK-DAD (E.D. Cal. filed Jan. 20, 2009); Martinez v. Encore Credit Corp., No. 09-cv05490-AHM-AGR (C.D. Cal. filed July 27, 2009). 7. 177. EquiFirst Corporation

EquiFirst Corporation (EquiFirst) originated mortgage loans that were pooled

into RMBS and purchased by ABP, including HEAT 2006-5 and HEAT 2007-1. EquiFirst was engaged in the business of originating and selling non-conforming loan products, including subprime, Alt-A, and jumbo mortgage loans collateralized by one-to-four family residential properties. For 2006, EquiFirsts subprime and Alt-A residential mortgage originations totaled approximately $10.7 billion. In 2007, EquiFirst was the twelfth-largest subprime wholesale mortgage originator in the United States, originating $3.8 billion of subprime home loans. 178. EquiFirst focused on innovative subprime products that relied on, among other

things, inappropriately lax underwriting standards and temporary payment reductions, offering loans to borrowers with credit scores as low as 520. As a consequence, EquiFirsts residential loan portfolio (including subprime mortgages), significantly deteriorated. Regions Financial Corporation (Regions), the then-parent company of EquiFirst, recorded $142 million in aftertax losses which it later attributed to significant and rapid deterioration of the subprime market during the first three months of 2007. Additionally, Regions 2007 Form 10-K revealed loan losses from continuing operations (including subprime mortgages made by EquiFirst) that more than tripled from 2006 levels, increasing from $142.4 million by the end of 2006 to $555 million by the end of 2007. 64

179.

On January 19, 2007, Barclays Bank, PLC announced that it had entered into an

agreement with Regions to acquire EquiFirst for $76 million. Regions CEO Dowd Ritter later said, I would have given [EquiFirst] away. If we didnt get rid of it, the whole company would be gone by now. On February 17, 2009, less than two years after the acquisition, Barclays shut down EquiFirst due to the decline in the market for subprime mortgages. 180. In September 2011, U.S. Bank N.A. initiated a lawsuit in federal court in

Minneapolis against EquiFirst and others, alleging that EquiFirst falsely assured buyers of the creditworthiness of the loans being offered, and that as of June 2011, over 45% of the original loan balance had been liquidated, while over 30% of the remaining loans were delinquent. According to a September 6, 2011, article in BLOOMBERG by Margaret Fisk about the case, one investor reviewed 200 loan files related to the securities at issue, and identified material breaches of representations or warranties in 150, or 75% of them. In 55 of the loans, according to the article, the investor found misrepresentations of borrower income and/or employment. In one example, a borrowers loan application stated that he earned over $14,000 per month for performing account analysis. According to the borrowers income tax returns, however, he earned $1,548 per month as a taxi driver. 181. These allegations are echoed in a September 2, 2011, complaint filed by the

FHFA, which states that EFC Holdings, through its EquiFirst unit, routinely and egregiously departed from its stated underwriting guidelines when originating subprime mortgages. This led, the suit alleges, to material false and misleading statements or omissions regarding compliance with underwriting guidelines in the Prospectus Supplements for several securities purchased by Freddie Mac, in violation of federal securities laws.

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8. 182.

Finance America, LLC

Finance America, LLC (Finance America) originated loans that were pooled

into RMBS purchased by Plaintiff, including HEMT 2005-5. Finance America was a wholesale subprime lender owned by Lehman Brothers, Inc. and was particularly known for its practices of charging high-rate interest on a majority of the loans that it originated. 183. In 2005, several class action lawsuits were filed against Finance America alleging

that it had violated the Fair Credit Reporting Act (FCRA) by unlawfully accessing individuals credit reports in order to target potential borrowers with poor credit or those who had recently filed for bankruptcy for subprime loans. See Fisher v. Finance Am., LLC, No. 05-cv-00888 (C.D. Cal. filed Sept. 13, 2005); Murray v. Finance Am., LLC, No. 05-cv-01255 (N.D. Ill. filed Mar. 2, 2005). 184. Another class action, filed in February 2008 in the Eastern District of Arkansas,

alleged that Finance America violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by engaging in a scheme to defraud consumers relating to the origination of mortgage loans. See Reichert v. UB Mortgage, LLC, et al., No. 08-cv-00158 (E.D. Ark. filed Feb. 21, 2008). The complaint claimed that Finance America intentionally structured its broker

premium fees to encourage brokers to negotiate loans at above market rates and permit[ted] an inference that the lender knew it was persuading clients to borrow at above market rates and was aware of the brokers fraud. 185. Finance America has also faced TILA claims. Suits against Finance America

have alleged predatory lending, failing to disclose material terms of loans, baiting borrowers with intentionally providing false and inaccurate information and then switching to a more costly loan at closing, as well as charging exorbitant broker and lender fees. See Ferrell v. Finance Am., LLC, et al., No. 10-cv-00715 (S.D. W.Va. filed May 7, 2010); Brannon v. Finance 66

Am., LLC et al., No. 06-cv-00996 (M.D. Ala. filed Nov. 2, 2006); Ricotta v. Finance Am., LLC et al., No. 06-cv-01502 (D. Colo. filed Aug. 2, 2006); Anderson v. Ocwen Fin. Corp. et al., No. 05cv-00243 (N.D. Miss. filed Oct. 31, 2005). 9. 186. Nationstar Mortgage LLC

Nationstar Mortgage LLC (Nationstar) was another originator of mortgage

loans pooled into RMBS purchased by ABP, including ABSC 2006-HE6. Nationstar, founded in 1997, was formerly known as Centex Home Equity Corporation (Centex).5 In March 2006, Fortress Investment Group (Fortress), a large hedge fund, purchased Centex for $575 million. Shortly after the purchase, Fortress changed Centrexs name to Nationstar. 187. Nationstar was one of the ten largest subprime lenders in the country, originating

$4.4 billion in the first quarter of 2007 before the market evaporated. The company provided non-prime mortgages and home loans directly to consumers and indirectly through mortgage brokers and bankers. Much of Nationstars success came as a result of the companys loose underwriting standards and lending practices. Nationstar routinely provided loans to borrowers without regard for their ability to repay, required little or no documentation for loans, and used fraudulently inflated appraisals. These risky lending practices resulted in serious financial

trouble for Nationstar after the subprime market went bust. In September 2007, Nationstar announced that it was shutting down its wholesale loan origination business for good. 188. In January 2008, Nationstar agreed to pay a $105,000 settlement to the Kentucky

Office of Financial Institutions (OFI) in order to resolve claims that Nationstar had employed numerous unregistered loan officers in violation of state law. The OFI also directed Nationstar to make refunds to customers, to reinstate and reduce interest rates and fees on mortgage loans,

Centex was also known as Centex Home Equity Company, LLC.

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and to adjust several customers loans where there were potential violations surrounding refinance terms. 189. As a result of its loose lending practices, Nationstar became the target of a

number of lawsuits. A lawsuit filed in July 2008 in the Eastern District of Virginia alleged that Nationstar had violated the TILA by preparing the plaintiffs loan application using an intentionally fraudulent stated income. See Flores v. Nationstar Mortgage LLC, No. 08-cv00675-LMB-TRJ (E.D. Va. filed July 1, 2008). Specifically, the borrower told Nationstar that he made $2,800 per month, but the Nationstar broker inflated the borrowers income to $6,000 per month in the loan documentation without the borrowers knowledge. As a result, Nationstar collected high brokers fees and closing costs, and the borrower was left with a loan that he could not afford. The parties agreed to settle the case in early 2009. 190. In September 2008, a class action was filed in San Diego Superior Court, alleging

that Nationstar and its predecessor Centex had coerced the plaintiffs into entering bad loans that destroyed plaintiffs credit and resulted in numerous foreclosures. See Richter v. Nationstar Mortgage, LLC, No. 37-2008-00092170-CU-BT-CTL (Cal. Super. filed Sept. 23, 2008). The complaint claimed that Nationstar knew that its San Diego branch manager, Cindy Kelly, was fraudulently selling unregistered securities to customers and that Nationstar encouraged her to ignore sound underwriting guidelines and to complete loan applications using false and incomplete information. Moreover, the defendants had promised borrowers that excess proceeds from their loans would be used as investments in Stonewood Consulting, Inc., a fraudulent investment firm that later became the target of an SEC proceeding in the Central District of California.

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191.

Another borrower brought an action against Nationstar in February 2010 in the

Northern District of Illinois Bankruptcy Court in connection with a foreclosure proceeding. Kemoy T.A. Liburd-Chow v. Nationstar Mortgage, LLC, et al, No. 10-02653 (Bankr. N.D. Ill. filed Feb. 16, 2010). The plaintiff alleged that Nationstar fraudulently induced him into entering a mortgage transaction that was contrary to his stated intentions and resulted in him receiving a loan that he could not afford. Specifically, the plaintiff claimed that Nationstar knowingly issued him a mortgage based on a fraudulently inflated property appraisal. dismissed in October 2010 by agreement of the parties. 192. Similarly, in September 2010, a complaint was filed in the State of Floridas This case was later

Circuit Court in Sarasota County, alleging violations of TILA based on Nationstars failure to disclose material terms of the plaintiffs mortgage. McClendon v. Nationstar Mortgage, LLC, No. 2010 CA 009303 NC (Fl. Cir. Ct., filed Sept. 3, 2010). The borrowers claimed that Nationstar failed to verify their ability to repay the loan before extending them credit and that the loan application contained no information about the plaintiffs monthly income. As a result, plaintiffs were saddled with a multitude of miscellaneous fees and ended up with a loan that they could not afford. 10. 193. OwnIt Mortgage Solutions, Inc.

Ownit Mortgage Solutions, Inc. (Ownit) originated mortgage loans that were

pooled in securitizations and purchased by Plaintiff, including HEAT 2006-5, HEAT 2006-6, HEAT 2006-7, HEAT 2006-8 and HEAT 2007-1. Ownit, formerly known as Oakmont

Mortgage Company, Inc., was a wholesale mortgage lender founded in 1989. Ownit was wellknown in the industry for its practices of originating 100%-financed subprime loans and providing loans to borrowers with poor credit and limited income. NONPRIME NEWS ranked

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Ownit as the 11th largest issuer of subprime mortgages in the United States, originating $5.46 billion in loans in the first half of 2006 alone. 194. In September 2005, Ownit sold a 20% share in the company to Merrill Lynch &

Co., Inc. (Merrill Lynch) for $100 million. According to Ownit founder and CEO William Dallas (Dallas), Merrill Lynch instructed Ownit to lower its underwriting standards and to originate more higher-yield, riskier loans, using its ownership stake and its $3.5 billion credit line to Ownit as leverage. Ownit complied with Merrill Lynchs directive, originating $6 billion in loans from September 2005 to December 2006, including crazy 45-year adjustable rate mortgages and no-income-verification loans. Dallas stated, The market [was] paying me to do a no-income-verification loan more than it [was] paying me to do the full documentation loans. 195. A May 8, 2007 article from the NEW YORK TIMES entitled East Coast Money Lent

Out West reported how Ownit increased loan volume by weakening underwriting standards and originating more liar loans for which no documentation was requested or required to substantiate the borrowers oral representations of their annual earnings. 196. Ownit also lowered the credit scores it required of its borrowers. The most

widely accepted measure of creditworthiness in the credit industry is the FICO score, developed by the Fair Isaac Corporation.6 The Federal Deposit Insurance Corporation defines a subprime loan as one for which the borrower has a FICO score of 660 or below. Ownits average new borrower FICO score dropped from 690 to approximately 630.

Under the FICO scoring system, borrowers are assigned a credit score (the FICO score) ranging from 300 to 850, with 850 being the most creditworthy. In determining the borrowers overall creditworthiness, the FICO score primarily takes into account the borrowers payment history, current indebtedness, length of credit history, recently established credit and types of credit used. According to Fitch Ratings, FICO scores are the best single indicator of mortgage default risk. Thus, the lower the FICO score, the greater risk of borrower default.

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197.

The intentional weakening of underwriting standards had an immediate and direct

impact upon the performance of Ownits loans. From December 2005 through May 2006, Ownit began to experience first payment defaults and early payment defaults (i.e., defaults on any one of the first three mortgage repayments). According to a December 8, 2006 article in WORKOUT WIRE entitled BuyBacks Appear to Shutter Two Firms, Ownit, unsurprisingly, filed for bankruptcy amid reports that the subprime lender had been hit by huge loan buyback requests from an investor. 198. Several consumer lawsuits followed soon thereafter. On May 5, 2009, a TILA

lawsuit was filed against Ownit alleging that the company had made misrepresentations to the borrower regarding the terms of a loan, including the interest rate, payment amount and the borrowers ability to refinance if the loan became unaffordable. See Vanduzen v. Homecomings Fin. et al., No. 09-cv-01237 (E.D. Cal. filed May 5, 2009). The complaint stated that Ownit regularly approved loans to unqualified borrowers, and implemented practices ranging from questionable to criminal. Moreover, Ownit employed brokers and loan officers [who] worked on commissions, meaning the more loans they sold, the more bonus money they received, and these brokers and loan officers steered borrowers into loans with less favorable terms or into loans the borrowers were not qualified for in order to make more money. 199. In October 2009, a lawsuit was filed against Ownit in the District of Nevada

alleging that the company lured unqualified borrowers into subprime mortgages while knowing many of the loans would result in foreclosure. See Youngren v. Ownit Mortgage Solutions, Inc., No. 09-cv-00595 (D. Nev. filed Oct. 5, 2009). The complaint stated that Ownit and its brokers and agents issued mortgages to borrowers who were incapable of paying the mortgages throughout the life of the loan, such as those with poor credit scores and inadequate income to

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afford the loan, and utilized numerous fees and penalties that increased the risk of default and foreclosure. The lawsuit included claims for unfair lending practices and fraud. 11. 200. Residential Funding Company, LLC

Residential Funding Capital LLC (Residential) originated mortgage loans

pooled into RMBS purchased by ABP, including ABSC 2007-HE1. Residential is a whollyowned subsidiary of Residential Capital Corporation, itself a wholly-owned subsidiary of General Motors Acceptance Corporation. In 2010, GMAC LLC was rebranded as Ally Financial Inc. Residential originates mortgage loans through its affiliates or purchases them from a network of individual mortgage originators, and also acts as a servicer for mortgage loans. From 2002 through the first quarter of 2007, Residential sponsored securitizations of more than 1.3 million first lien mortgage loans with an aggregate principal balance of more than $243 billion. 201. MBIA, a company that had sold financial guaranty insurance policies for five

securitization transactions sponsored by Residential, conducted a review of 1,847 delinquent loans that Residential had originated, and found that a mere 7% of the mortgage loans it reviewed had been originated or acquired in material compliance with Residentials representations and warranties. 202. MBIAs review uncovered widespread failures in underwriting standards on the

part of Residential. Residential had failed to verify its borrowers income or assets, failed to review its borrowers credit histories, failed to obtain property appraisals, and granted underwriting exceptions without any justification for doing so. For example, in November 2006 Residential made a $140,000 loan to a borrower on a non-owner occupied property with an original appraisal value of $740,000 and a senior loan balance of $513,567. The borrower, who was employed as the owner of a liquor store, claimed an income of $500,000 per year but demonstrated no liquid assets. In 2007, the borrower filed for bankruptcy, claiming that he or 72

she had earned $0 for 2006. Furthermore, the appraisal indicated that the mortgaged property did not meet legal standards. 203. In another lawsuit, MBIA alleged that Residential had entered into negotiated

commitments with a number of loan originators, whereby Residential agreed that it would purchase mortgage loans from originators in the future even if those loans did not comply with Residentials underwriting guidelines. See MBIA Ins. Corp. v. Residential Funding Co., No. 603552/2008 (Sup. Ct. N.Y. Co. filed Dec. 4, 2008). Residential then proceeded to securitize these loans while falsely representing that they had been underwritten in substantial compliance with its underwriting guidelines. 204. MBIA also claimed that Residential had engaged in a bulk purchase program,

whereby Residential agreed to purchase a bulk amount of mortgage loans that had already been originated without re-underwriting the loans being acquired or otherwise confirming that they complied with Residentials underwriting guidelines. Again, Residential securitized these loans while falsely representing that they had been underwritten in substantial compliance with its underwriting guidelines. 205. MBIA further alleged that Assetwise, the computer program that Residential

underwriting personnel used in deciding whether or not to approve individual loans for purchase, did not in fact apply the stated Residential underwriting guidelines, and that numerous mortgage loans approved through Assetwise did not comply with underwriting guidelines. 206. A securities lawsuit filed by the West Virginia Investment Management Board

quoted a former Residential employee as saying that Residential needed to continue to purchase more loans for the securitizations, or they would have been out of business. West Virginia Inv. Mgmt. Board v. Residential Accredited Loans, Inc., No. 10-c-412 (W. Va. Cir. Ct filed Mar. 4,

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2010). The employee said that Residentials President and CEO Bruce Paradis would directly encourage Residential traders with reservations about loan quality to buy the loans anyway so as to maintain good relations with the vendors from that Residential bought billions of dollars of loans from. VI. A SIGNIFICANT NUMBER OF THE MORTGAGE LOANS WERE MADE TO BORROWERS WHO DID NOT OCCUPY THE PROPERTIES IN QUESTION 207. The Offering Documents contained information regarding the purported

occupancy status of the mortgaged properties including whether they were primary homes, investment property, or second homes. These representations were material to investors such as Plaintiff because high owner-occupancy rates would have made the Certificates safer investments than Certificates backed by second homes or investment properties. Thus,

Defendants had an incentive to overstate the owner-occupancy rates of the underlying mortgages to make them appear more secure. 208. Fraudulent representations regarding the owner-occupancy status of pooled

mortgages were widespread in the securitization industry. As noted in a January 2011 article in BUSINESSWEEK, at least 23% of U.S. mortgages that were described as being secured by owner occupied properties when bundled into securities either were not occupied by borrowers, or were occupied for a short time and quickly vacated. 209. In connection with lawsuits against Credit Suisse Securities and other Credit

Suisse entities, two other companies, Mass Mutual and Allstate, both conducted forensic reviews of the mortgage loans underlying RMBS issued by Credit Suisse entities, which included loans from the same series and time period as offerings in which ABP invested. For each of the RMBS that Mass Mutual and Allstate examined, DLJ was the sponsor, CSFB Mortgage or ABS was the depositor, and Credit Suisse Securities was the underwriter. DLJ or

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CSFC originated many of the loans at issue. Mass Mutuals and Allstates analyses included testing to determine if the owner-occupancy ratios in the Offering Documents were accurate, by, for example, investigating whether borrowers were having tax statements and bills sent to the addresses of the mortgaged properties and whether property records showed that the borrowers owned multiple houses. 210. Allstate examined 800 defaulted loans and 800 randomly sampled loans from

each of eight Credit Suisse securitizations, including HEMT 2005-5 which ABP purchased, and HEMT 2006-2, part of the same series of offerings in which ABP invested. Allstate discovered that the offering documents overstated the owner-occupancy ratio by between 9.61% and 14.88% for each of the RMBS that it analyzed. On information and belief, the Offering Documents of the Credit Suisse securities purchased by ABP suffer from similar defects as those identified by Allstate. 211. Mass Mutual examined the 29,705 loans underlying nine Credit Suisse

securitizations, and discovered that the offering documents overstated the owner-occupancy ratio by up to 16.9% for each of the RMBS that it analyzed. Mass Mutuals analysis involved four offerings which were part of the CSAB series of offerings in which ABP invested, and on information and belief, the Offering Documents of the CSAB securities purchased by ABP suffer from similar defects as those identified by Mass Mutual. 212. The FHFA performed a similar analysis of individual loan files in connection

with its lawsuit against Credit Suisse. Its analysis covered 43 RMBS which included loans from the same series and time period as offerings in which ABP invested and revealed that in each case, the offering documents had overstated the owner-occupancy rates by as much as

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17.46%. Nine of the RMBS that the FHFA investigated were also purchased by Plaintiff, all of which overstated owner-occupancy rates by at least 8% as set forth below: Issuing Trust ABSC 2006-HE6 ABSC 2006-HE7 ABSC 2007-HE1 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1 Percentage OwnerOccupancy Rate Overstated 9.04% 9.95% 9.12% 8% 10.65% 13.04% 10.4% 12.73%

213.

The Certificates purchased by Plaintiff were secured by different subgroups of

mortgage loans than the Certificates that were the subject of the FHFA Complaint. However, on information and belief, the mortgage loans underlying all of the Certificates purchased by Plaintiff suffer from similar deficiencies as the mortgage loans underlying the Certificates reviewed by Mass Mutual, Allstate and the FHFA. Three separate analyses covering dozens of separate offerings and tens of thousands of underlying mortgage loans have revealed that Credit Suisse consistently overstated the owner-occupancy rates in the offering documents for its RMBS.

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VII.

DEFENDANTS MISREPRESENTED THE LTV RATIOS OF THE MORTGAGE LOANS AND THE NUMBER OF PROPERTIES WORTH LESS THAN THE OUTSTANDING LOANS 214. As discussed in Section III, supra, the LTV ratio is one of the most important

measures of the riskiness of a loan. Loans with high LTV ratios are more likely to default because the owner has less of an interest in the property. Furthermore, if a borrower does default and the property enters foreclosure, the Issuing Trust is much more likely to recover the outstanding balance on the loan through a foreclosure sale if the LTV ratio is low. 215. Mortgage loans that are underwater that is to say, those where the LTV ratio

is greater than 100% because the value of the outstanding loan exceeds the value of the collateral are extremely risky investments. In these cases, the borrower has a strong incentive to default, the possibility that the borrower will be capable of refinancing is virtually nil, and if the mortgage enters foreclosure, the Issuing Trust will definitely incur a loss. Indeed, Defendants recognized the importance of the LTV ratio. The Mortgage Liquidity Report discussed in Section IV.C. characterized loans with combined LTV ratios of 94% or greater as alarming. 216. Some appraisers were openly instructed to alter their valuations for the benefit of

the mortgage lenders. On October 24, 2007, Alan Hummel, the chair of the Appraisal Institutes Government Relations Committee, testified before the House Committee on Financial Services on Legislative Proposals on Reforming Mortgage Practices as follows: Unfortunately, these parties with a vested interest in the transaction are often the same people managing the appraisal process within many financial institutions, and therein is a terrible conflict of interest ... [I]t is common for a client to ask an appraiser to remove details about the material condition of the property to avoid problems in the underwriting process. A 2007 study conducted by the October Research Corporation reported that 90% of appraisers had been pressured to raise

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property valuations so that deals could go through, and that 75% of appraisers reported negative ramifications if they did not alter their appraisals accordingly. 217. Even absent explicit coercion or collusion, mortgage originators could inflate

apparent home values simply by offering work only to compliant appraisers. According to the April 7, 2010 testimony of Richard Bitner (Bitner), a former executive of a subprime mortgage originator, before the FCIC, [B]rokers didnt need to exert direct influence. Instead they picked another appraiser until someone consistently delivered the results they needed. 218. Widespread and systematic overvaluations by mortgage originators set into

motion a snowball effect that inflated housing prices all across the country and further distorted the RMBS market. As Bitner testified, If multiple properties in an area are overvalued by 10%, they become comparable sales for future appraisals. The process then repeats itself. We saw it on several occasions. Wed close a loan in January and see the subject property show up as a comparable sale in the same neighborhood six months later. Except this time, the new subject property, which was nearly identical in size and style to the home we financed in January, was being appraised for 10% more ... In the end, the subprime industrys willingness to consistently accept overvalued appraisals significantly contributed to the run-up in property values experienced throughout the country. 219. In instances where LTV values have been distorted by faulty appraisals, RMBS

investors may be unaware of the true value of their collateral until default and foreclosure occur. The FCIC Report discussed this problem. As the housing market expanded, another problem emerged, in subprime and prime mortgages alike: inflated appraisals. For the lender, inflated appraisals meant greater losses if a borrower defaulted. But for the borrower or for the broker or loan officer who hired the appraiser, an inflated value could make the difference between closing and losing the deal. Imagine a home selling for $200,000 that an appraiser says is actually worth only $175,000. In this case, a bank wont lend a borrower, say, $180,000 to buy the home. The deal dies. Sure enough, appraisers 78

began feeling pressure. One 2003 survey found that 55% of the appraisers had felt pressed to inflate the value of homes; by 2006, this had climbed to 90%. 220. It is clear that Credit Suisse knew of the appraisal abuses that were occurring.

The Mortgage Liquidity Report states that, As lenders are getting clobbered by bad loans made on properties with inflated appraisal values, many are finally pulling the reigns [sic] on some of the lax appraisal methods used in recent years (some have gone as far as calling it fraud in extreme cases). The Mortgage Liquidity Report also discusses how originators distorted LTV values through the use of piggyback loans in which a loan for approximately 80% of the homes value was combined with a simultaneous second loan for the remainder. Because mortgages in which the borrower puts no money down are very risky, such borrowers were traditionally required to purchase private mortgage insurance. By splitting a loan with an LTV ratio of 100% (or more) into two loans, the originator could make the loan appear safer than it actually was and sidestep the insurance requirement. The Mortgage Liquidity Report states that, The widespread popularity of second mortgages (piggybacks) in recent years, which are not included in traditional loan-tovalue calculations, has made these LTV datapoints particularly misleading and almost irrelevant. Based on data from SMR Research, approximately 40% of home purchase mortgages in 2006 involved piggyback loans through the third quarter, compared to 20% in 2001 ... In its infancy, piggyback loans were primarily used to avoid paying mortgage insurance. In recent years, however, the share of loans with piggybacks has skyrocketed in markets that have seen the greatest price increases, indicating that the mortgage product has evolved into a tool used by homebuyers to purchase a home potentially above their means. 221. Defendants had a responsibility to ensure that the LTV figures they presented in

the Offering Documents were not the product of fraudulent appraisals. As the Levin Report stated, Whether appraisals are conducted internally by the bank or through a vendor, the bank

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must take responsibility for establishing a standard process to ensure accurate, unbiased home appraisal values. 222. Numerous emails reflecting Credit Suisse employees knowledge of inadequate

appraisal practices and documentation became available as of March 25, 2011. One email chain from August 2006 involved a boarded-up and gutted property that one Credit Suisse employee described as a crack house. Another employee stated, Had an agent in the area look into that [redacted] property for me. Attached is the recent sale history. Looks like it was sold at a foreclosure sale for $437,500 on 12/9/05 then came our first and second on 12/27 for $645,000..nice little 200k pickup while doing nothing except paying an appraiser to look at the wrong house. I say this because neighbors indicate the property was in the current condition for at least nine months. 223. Another email chain from 2007 discussing an appraisal for a loan file contains

statements such as: I dont feel this report was prepared according to USPAP The appraisal provided did not tell me what occurred to justify a $310K increase in 14 months I dont feel the appraiser did an adequate job of supporting the $615K value given I reviewed the other appraisalthat was just supplied by the seller. This appraiser indicates 4 units for sale versus 69 reported a month later. That raises a huge red flag. 224. The emails similarly articulated a lack of documentation regarding borrowers

income. One email chain discussed the stated income contained in loan documentation for a borrower who was employed as a stripper, which claimed that she made approximately $12,000 per month, or $142,800 per year, in a small North Carolina town. When the broker who originated the deal attempted to defend the stated amounts, one Credit Suisse employee stated:

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This is really asking for a second opinion, to which another employee responded, Agree that it appears to be overstated. If it isnt overstate[d], why cant she give us bank statements? 225. The forensic reviews of the loans underlying scores of Credit Suisse RMBS

conducted by Mass Mutual, Allstate and the FHFA revealed that, in addition to consistently misrepresenting owner-occupancy rates, Credit Suisse also consistently misrepresented the LTV ratios of the underlying mortgages and the number of properties with high LTV ratios. For each loan they examined, Mass Mutual, Allstate and the FHFA used an industry standard automated valuation model (AVM) to calculate the value of the mortgaged property at the time of origination. AVMs are commonly used in the real estate industry and rely upon similar data as that relied on by appraisers, including county records, tax records, and data on comparable properties. 226. The FHFAs review of 43 Credit Suisse RMBS revealed that in each case but one,

the offering documents overstated the percentage of loans with low LTV ratios (defined as LTV ratios less than 80%) and by as much as 42.53%. The offering documents understated the percentage of underwater loans (loans with LTV ratios greater than 100%) by as much as 40.52%. Specifically, with respect to the nine RMBS also purchased by Plaintiff: Issuing Trust ABSC 2006-HE6 ABSC 2006-HE7 ABSC 2007-HE1 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 Overstated Percentage with Low LTVs 13.8% 9.72% 16.77% 26.17% 23.49% 22.38% Understated Percentage of Underwater Loans 20.71% 27.03% 21.22% 16.47% 14.22% 16.82%

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Issuing Trust HEAT 2006-8 HEAT 2007-1

Overstated Percentage with Low LTVs 23.25% 21.07%

Understated Percentage of Underwater Loans 17.78% 19.21%

227.

Although Mass Mutual and Allstate presented their data differently than the

FHFA did, their reviews also revealed significant misrepresentations of LTV data. Allstate found that for six of the eight Credit Suisse RMBS it analyzed, the offering documents had understated the weighted average LTV ratio by between 6.71% and 13.15%, understated the percentage of loans with high LTV ratios (defined as LTV ratios greater than 90%) by between 15.71% and 30.27%, and understated the percentage of underwater loans by between 8.16% and 65.92%. Allstates review of the HEMT 2005-5 RMBS, which was also purchased by Plaintiff, revealed that the offering documents understated the percentage of underwater loans by 62.27%. 228. Mass Mutual found that for each of the nine Credit Suisse RMBS it analyzed, the

offering documents had understated the weighted average LTV ratio by between 5.33% and 16.41% and understated the percentage of loans with high LTV ratios (defined as LTV ratios greater than 90%) by between 4.7% and 20.99%. 229. On information and belief, the mortgage loans underlying all of the Certificates

purchased by Plaintiff which included loans from the same series and time periods as offerings that Mass Mutual, Allstate and the FHFA analyzed suffer from similar deficiencies as the mortgage loans underlying the Certificates reviewed by Mass Mutual, Allstate and the FHFA. The loan-level analyses reveal that Defendants have engaged in a systematic practice of understating LTV ratios and the number of underwater properties.

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VIII.

THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES MATERIALLY MISREPRESENTED THE CREDIT RISK OF THE CERTIFICATES 230. The AAA credit ratings of the Certificates were an important factor in Plaintiffs

decision to purchase the Certificates. Because Plaintiff is a conservative institutional investor, it purchased only investment grade Certificates, all of which were rated AAA. 231. Investment grade securities are understood by investors to be stable, secure and

safe. A rating of AAA denotes high credit quality, and is the same rating as those typically assigned to bonds backed by the full faith and credit of the United States Government, such as treasury bills. Historically, before 2007, investments with AAA ratings had an expected

cumulative loss rate of less than 0.5 percent, with an annual loss rate of close to zero. According to S&P, the default rate on all investment grade corporate bonds (including AA, A and BBB) from 1981 to 2007, for example, averaged about .094% per year and was not higher than 0.41% in any year. 232. The Defendants well understood (and banked on) the importance that purchasers

of mortgage-backed securities attached to credit ratings. In most cases, the purchasers were institutional investors such as Plaintiff who did not have the knowledge, means or wherewithal to independently analyze the mortgage pools underlying any particular offering to verify for themselves that the ratings were accurately determined. 233. Accordingly, Defendants featured the ratings prominently in the Offering

Documents and discussed at length the ratings assigned to the Certificates, and the basis for the ratings. Each Prospectus Supplement stated that the issuance of each tranche of the Certificates was conditioned on the assignment of particular ratings, and listed the ratings in a chart. All of the Certificates purchased by Plaintiff were AAA-rated securities.

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234.

Unbeknownst to ABP, at all relevant times, Defendants knew that the ratings

were not reliable because those ratings were bought and paid for and were supported by flawed information provided by Defendants to the rating agencies. In fact, Credit Suisse manipulated the rating agencies to obtain the desired ratings for the Certificates. 235. Specifically, the ratings of the Certificates were significantly compromised by

the misinformation provided by Credit Suisse to the rating agencies. Among other matters, Credit Suisse did not disclose to the rating agencies that the originators, including Credit Suisse-affiliated entities, had abandoned their underwriting standards by, among other things, manipulating the assets, liabilities, income and other important information concerning borrowers; using false metrics to qualify borrowers; and aggressively using exceptions to qualify borrowers. Credit Suisse did not disclose its knowledge that, in obtaining appraisals to value the underlying collateral, the originators used inflated appraisals that departed from industry-approved standards. Credit Suisse did not otherwise disclose its knowledge of the pervasive fraud that affected the mortgages underlying the Certificates. 236. Apart from supplying incomplete and false information to the rating agencies,

Credit Suisse also manipulated its relationship with the rating agencies in order to achieve the desired ratings. The rating agencies received enormous revenues from the issuers who paid them for rating their securities. Because the desired rating of a securitized product was the starting point for any securities offering, the rating agencies were actively involved in helping Credit Suisse structure the products to achieve the requested rating. As a result, the rating agencies essentially worked backwards, starting with Credit Suisses target rating and then working toward a structure that would yield the desired rating. Among other things, the rating

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agencies instructed Credit Suisse on how much credit enhancement to provide to each tranche of the Certificates, in order to secure the desired ratings. 237. In this manner, Credit Suisse was able to manipulate the rating agencies to

achieve the inflated ratings it desired. Through repeated communications with the rating agencies, Credit Suisse effectively was able to reverse engineer aspects of the ratings models and then modify the structure of an offering to improve the ratings without actually improving the underlying credit quality. 238. In a July 2008 report entitled Summary Report of Issues Identified in the

Commission Staffs Examinations of Select Credit Rating Agencies, the SEC confirms that the issuers and the rating agencies worked together so that securities would receive the highest ratings: [T]ypically, if the analyst concludes that the capital structure of the RMBS does not support the desired ratings, this preliminary conclusion would be conveyed to the arranger. The arranger could accept that determination and have the trust issue the securities with the proposed capital structure and the lower rating or adjust the structure to provide the requisite credit enhancement for the senior tranche to get the desired highest rating. Generally, arrangers aim for the largest possible senior tranche, i.e., to provide the least amount of credit enhancement possible, since the senior tranche -- as the highest rated tranche -- pays the lowest coupon rate of the RMBS tranches and, therefore, costs the arranger the least to fund. 239. The rating process was further compromised by the practice of rating shopping.

Credit Suisse did not pay for the credit rating agencies services until after the agencies submitted a preliminary rating. Essentially, this practice created bidding wars in which the issuers would hire the agency that was providing the highest rating for the lowest price. The credit rating agencies were only paid if they delivered the desired investment grade ratings, and

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only in the event that the transaction closed with those ratings. Ratings shopping jeopardized both the integrity and independence of the rating process. 240. The FCIC Report also discussed how investment bankers, such as Credit Suisse,

would apply pressure to ratings agencies such as Moodys in order to get the desired ratings for asset-backed securities. For example, one Moodys employee testified that bankers would

provide the agencies with relatively little notice, few documents and practically no time to make adequate analyses of the deals in question. In another example, a director at Credit Suisse sent an email to a Moodys employee stating, Im going to have a major political problem if we cant make this [deal rating] short and sweet because, even though I always explain to investors that closing is subject to Moodys timelines, they often choose not to hear it. 241. The Levin Report reported that, because of the pressure received from Credit

Suisse and other banks, the ratings agencies embarked on a slippery slope of not maintaining appropriate standards in their ratings analyses. For example, one Moodys analyst described the difficulty involved in allowing an exception for a rating once and then demanding different conduct in the future: I am worried that we are not able to give these complicated deals the attention they really deserve, and that they [Credit Suisse] are taking advantage of the light review and the growing sense of precedent. 242. Credit Suisse took the pressure applied on ratings agencies a step further by

barring diligent ratings analysts from working on its deals. Richard Michalek, a Moodys analyst, testified before the FCIC that he was prohibited from working on RMBS transactions for several banks, including Credit Suisse, because he examined the deals too closely. He stated: During my tenure at Moodys, I was explicitly told that I was not welcome on deals structured

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by certain banksI was told by my then-current managing director in 2001 that I was asked to be replaced on future deals by [CSFB Mortgage], and then at Merrill Lynch. 243. Credit Suisses business dealings with the ratings agencies subsequently became

the subject of an investigation by the New York State Attorney Generals Office (NYAG), In May 2010, the NYAG sought to determine whether Credit Suisse, along with seven other banks, was providing misleading information to credit rating agencies and whether proper disclosures were being made about the securities. The NEW YORK TIMES reported on May 13, 2010, that the ratings agencies had been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed, but the NYAG questioned whether the agencies may have been duped by one or more of the targets of his investigation, including Credit Suisse. 244. As a result, the Certificates were not worthy of the investment grade ratings given

to them, as evidenced most clearly by the fact that many of the Certificates all initially awarded the highest possible ratings have now been downgraded to junk, a vast number of the underlying loans have been foreclosed upon, and the remaining underlying loans are suffering from crippling deficiencies and face serious risks of default. The collective downgrade of AAArated Certificates indicates that the ratings set forth in the Offering Documents were false, unreliable and inflated. 245. By including and endorsing the AAA and other investment grade ratings

contained in the Offering Documents, Defendants falsely represented that they actually believed that the ratings were an accurate reflection of the credit quality of the Certificates.

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IX.

DEFENDANTS MISREPRESENTED THE EXTENT OF CREDIT ENHANCEMENT INCLUDED IN THE CERTIFICATES 246. Defendants used a variety of credit enhancements to make the Certificates seem

like more attractive and less risky investments. Credit enhancement represents the amount of cushion or protection from loss exhibited by a given security. This cushion is intended to improve the likelihood that holders of highly rated Certificates receive the interest and principal they expect based on the Offering Documents. The level of credit enhancement offered is based on the makeup of the loans in the underlying collateral pool. Riskier pools necessarily need higher levels of credit enhancement to ensure payment to senior certificate holders. Credit enhancements for a given trust also impact the overall credit rating that a given tranche of Certificates receives. The level of credit enhancement for the Certificates was material to Plaintiff because it represented the protection purportedly afforded from loss. 247. The most common form of credit enhancement in the Offering Documents was

subordination in which the Defendants created a hierarchy of loss absorption among the tranches of securities. To create that hierarchy, Defendants placed the pools tranches in an order, with the lowest tranche required to absorb any losses first, before the next highest tranche. Losses might occur, for example, if borrowers defaulted on their mortgages and stopped making mortgage payments into the pool. Lower level tranches most at risk of having to absorb losses typically received noninvestment grade ratings from the credit rating agencies, while the higher level tranches that were protected from loss typically received investment grade ratings. One key task for both Defendants and the credit rating agencies was to calculate the amount of subordination required to ensure that the higher tranches in a pool were protected from loss and could be given Aaa or other investment grade ratings.

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248.

A second common form of credit enhancement was over-collateralization. In

this credit enhancement, the Defendants represented that the revenues expected to be produced by the assets in a pool would exceed the revenues designated to be paid out to each of the tranches. That excess amount provided a financial cushion for the pool and was used to create an equity tranche, which was the first tranche in the pool to absorb losses if the expected payments into the pool were reduced. This equity tranche was subordinate to all the other tranches in the pool and did not receive any credit rating. The larger the excess, the larger the equity tranche, and the larger the cushion created to absorb losses and protect the more senior tranches in the pool. In some pools, the equity tranche was also designed to pay a relatively higher rate of return to the party or parties who held that tranche, due to its higher risk. 249. Still another common form of credit enhancement was the creation of excess

spread, which involved designating an amount of revenue to pay the pools monthly expenses and other liabilities, but ensuring that the amount was slightly more than what was likely needed for that purpose. Any funds not actually spent on expenses would provide an additional financial cushion to absorb losses, if necessary. 250. According to the Levin Report, former ratings agency analysts and managers told

the PSI that investment banks pressured them to get their deals done quickly, increase the size of the tranches that received AAA ratings and reduce the credit enhancements protecting the AAA tranches from loss. 251. As set forth below, representations regarding the inclusion and scope of these

credit enhancements were made in all of the Offering Documents for the Certificates ABP purchased. These representations were false and misleading because all of the purported

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enhancements depended on or derived from inflated appraisals of the mortgaged properties, which caused the listed LTV ratios and levels of credit enhancement to be untrue. X. DEFENDANTS FAILED TO ENSURE THAT TITLE TO THE UNDERLYING MORTGAGE LOANS WAS EFFECTIVELY TRANSFERRED 252. A fundamental aspect of the mortgage securitization process is that the issuing

trust for each offering must obtain good title to the mortgage loans comprising the pool for that offering. This is necessary in order for the holders of the RMBS, such as Plaintiff, to be legally entitled to enforce the mortgage loans in the event of default. Two documents relating to each mortgage loan must be validly transferred to the trust as part of the securitization process a promissory note and a security instrument (either a mortgage or a deed of trust). 253. The rules for these transfers are governed by the law of the state where the

property is located, by the terms of the PSAs for each securitization, and by the law governing the issuing trust (with respect to matters of trust law). In general, state laws and the PSAs require the promissory note and security instrument to be transferred by indorsement, in the same way that a check can be transferred by indorsement, or by sale. In addition, state laws generally require that the trustee of the issuing trust have physical possession of the original, manuallysigned promissory note in order for the loan to be enforceable by the trustee against the borrower in the event of the borrowers default. 254. In order to preserve the bankruptcy-remote status of the issuing trusts in RMBS

transactions, the notes and security instruments are generally not directly transferred from the mortgage loan originator to the trust. Rather, the notes and security instruments are initially transferred from the originator to the depositor, either directly or via one or more special-purpose entities. After this initial transfer to the depositor, the depositor transfers the notes and security

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interests to the issuing trust for the particular securitization. Each of these transfers must be valid under applicable state law in order for the trust to have good title to the mortgage loans. 255. To ensure that the trust qualifies as a tax-free real estate mortgage investment

conduit, the PSA generally requires the transfers to the trust to be completed within a strict time limit after formation of the trust. Furthermore, the applicable trust law in each state generally requires strict compliance with the trust documents, including the PSA, so that failure to comply strictly with the timeliness, indorsement, physical delivery, and other requirements of the PSA with respect to the transfers of the notes and security instruments means that the transfers would be void and the trust would not have good title to the mortgage loans. Adam Levitin, a professor of law at Georgetown University, testified before the United States House Subcommittee on Housing and Community Opportunity, that, If the notes and mortgages were not properly transferred to the trusts, then the mortgage-backed securities that the investors purchased were in fact non-mortgage backed securities. 256. On November 18, 2010, Professor Levitin testified about the importance of the

chain of title to investors and the consequences of faulty transfers before a hearing of the House Financial Services Committee: Concerns about securitization chain of title also go to the standing question; if the mortgages were not properly transferred in the securitization process (including through the use of MERS to record the mortgages), then the party bringing the foreclosure does not in fact own the mortgage and therefore lacks standing to foreclose. If the mortgage was not properly transferred, there are profound implications too for investors, as the mortgage-backed securities they believed they had purchased would, in fact be nonmortgage-backed securities, which would almost assuredly lead investors to demand that their investment contracts be rescinded[.] * * *

Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed 91

form punctiliously. The rules of the game with securitization, as with real property law and secured credit are, and always have been, that dotting is and crossing ts matter, in part to ensure the fairness of the system and avoid confusions about conflicting claims to property. Close enough doesnt do it in securitization; if you dont do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work. Thus, it is important not to dismiss securitization problems as merely technical; these issues are no more technicalities than the borrowers signature on a mortgage. Cutting corners may improve securitizations economic efficiency, but it undermines its legal viability. 257. On October 27, 2010, Katherine Porter, then a visiting a professor at Harvard Law

School specializing in consumer credit, consumer protection regulation, and mortgage servicing, provided similar testimony before the Congressional Oversight Panel: The implications of problems with transfer are serious. If the [securitization] trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation. * * *

I want to share with the Panel that the lawyers that I have met over years of my research on mortgage servicing both creditor lawyers and debtor lawyers have nearly universally expressed that they believe a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure.

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258.

The Offering Documents for the Certificates represented in substance that the

Issuing Trust for the respective offering had obtained good title to the mortgage loans comprising the pool underlying the offering. In fact, however, the third-party originators and Defendants routinely and systematically failed to comply with the requirements of applicable state laws and the PSAs for valid transfers of the notes and security instruments. 259. For example, a July 7, 2011, MSNBC.com article, Robo-Signing Foreclosures

Havent Gone Away, discusses an attempt by Defendant DLJ to foreclose on Mary Arthur of Dobbs Ferry, New York. The loan servicer, Defendant SPS, filed to foreclose on DLJs behalf, thereby incurring additional fees for itself and reducing the amount available for investors to recover. In separate cases in state court and bankruptcy court, DLJ filed what it purported to be authentic copies of Mrs. Arthurs promissory note. Since they were supposedly copies of the same document, the indorsements should have been identical. However, they had completely different indorsements, each naming different owner banks and signed by different people. XI. DEFENDANTS SPECIFIC MATERIAL MISSTATEMENTS AND OMISSIONS IN THE OFFERING DOCUMENTS 260. Defendants representations regarding the mortgage loans underlying the

Offerings were highly material to investors such as Plaintiff. Because the revenue paid to investors is derived from the stream of payments received from the mortgage loan borrowers, the value of an investment is necessarily tied to the perceived risk of default in the mortgage loan pool. In other words, the market value of a Certificate decreases as the perceived risk of the underlying pool increases. Plaintiff therefore closely examined the representations made by the Defendants regarding the mortgage loans underlying each of the Offerings at issue here. 261. Moreover, Defendants went above and beyond the specific representations to

warrant that if any material pool characteristic differed by 5% or more from the description in

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the Offering Documents, they would provide notice and repurchase those Certificates. Defendants also made assurances as to how the specific loans were selected for inclusion in the mortgage pools: (a) In the event that Mortgage Loans are added to or deleted from the Mortgage Pool after the date of the related prospectus supplement but on or before the date of issuance of the Notes or the Certificates, if any material pool characteristic differs by 5% or more from the description in the prospectus supplement, revised information will be provided either in a supplement or in a Current Report on Form 10-D or 8-K filed with the Commission.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 136 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 166 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 157 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 146 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 26 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at 26 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at 26 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at 26 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at 26 (Dec. 4, 2006); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 25 (Dec. 29, 2005); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 140 (Feb. 1, 2007); Registration Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 215 (Mar. 15, 2006); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 250 (Aug. 10, 2006).

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(b)

Certain information with respect to the mortgage loans is set forth in this prospectus supplement. Prior to the closing date, mortgage loans may be substituted therefor. Certain of the mortgage loans may prepay in full, or may be determined not to meet the eligibility requirements for the final pool of the mortgage loans acquired by the trust on the closing date. The Depositor believes that the information set forth in this prospectus supplement is representative of the characteristics of the mortgage pool as it will be constituted at the closing date, although certain characteristics of the mortgage loans may vary.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at S-27 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at S-27 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at S-27 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at S-29 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at S-21 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-19 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-19 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-19 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-19 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at S-19 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at S-18 (Dec. 29, 2005); Registration Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 26 (Mar. 15, 2006); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 11 (Aug. 10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3), at 9 (Mar. 31, 2006). (c) The sponsor selected the mortgage loans for sale to the depositor from among its portfolio of mortgage loans based on a variety of considerations, including type of mortgage loan, geographic concentration, range of mortgage interest rates, principal balance, credit scores 95

and other characteristics. In making this selection, the sponsor took into account investor preferences and the sponsors objective of obtaining the most favorable combination of ratings on the certificates. The above misstatement was contained in the following Offering Documents: Prospectus

Supplement for CSAB 2006-3 (Form 424B5), at S-21 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-19 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-19 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-19 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-19 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at S-19 (Feb. 1, 2007). (d) Each mortgage loan will be selected by the depositor or its affiliates for inclusion in a mortgage pool from among those purchased by the depositor, either directly or through its affiliates, from unaffiliated sellers or affiliated sellers. As to each series of securities, the mortgage loans will be selected for inclusion in the mortgage pool based on rating agency criteria, compliance with representations and warranties, and conformity to criteria relating to the characterization of securities for tax, ERISA, SMMEA, Form S-3 eligibility and other legal purposes.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 27 (Oct. 30, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 140 (Feb. 1, 2007); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 36 (Aug. 10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3), at 222 (Mar. 31, 2006). (e) The mortgage loans to be included in the mortgage pool were acquired by the seller in the normal course of its business and in accordance with the underwriting criteria specified in this prospectus supplement.

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The above misstatement was contained in the following Offering Document: Supplement for HEMT 2005-5 (Form 424B5), at S-18 (Dec. 29, 2005). 262.

Prospectus

These representations were false when made because Defendants knew that the

information set forth in the Prospectus Supplements did not adequately describe the characteristics of the mortgage pools, and that at the time of sale material pool characteristics differed by 5% or more from the descriptions given, due to factors such as appraisals that did not comply with USPAP standards and inflated LTV values. In addition, Defendants did not select the loans to be included in mortgage pools based on investor preferences or preset standards, but rather, on the basis of which loans would be most profitable to securitize and least likely to incur loss to Defendants. 263. In light of the numerous departures from underwriting guidelines and appraisal

standards by CSFC, DLJ and the third-party originators described above, the Offering Documents (Registration Statements and Prospectus Supplements) disseminated by Defendants in the course of selling the Certificates contained numerous misstatements and omissions, as set forth below. A. 264. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING STANDARDS AND PRACTICES The Prospectus Supplements disseminated by Defendants in the course of selling

the Certificates, and therefore the Registration Statements of which those Prospectus Supplements formed a part, contained the following misleading statements, among others, in identical or substantially similar language, regarding the underwriting standards and practices that the originators applied in originating the mortgage loans underlying the Certificates. (a) The originators underwriting standards are primarily intended to assess the value of the mortgaged property and to evaluate the adequacy of that property as collateral for the mortgage loan and the applicants 97

credit standing and ability to repay. Each originator provides loans primarily to borrowers who do not qualify for loans conforming to Fannie Mae and Freddie Mac guidelines but who generally have equity in their property. While the primary consideration in underwriting a mortgage loan is the value and adequacy of the mortgaged property as collateral, the originators also consider, among other things, a mortgagors credit history, repayment ability and debt service-to-income ratio, as well as the type and use of the mortgaged property. The above misstatements were contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at S-16 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at S-16 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at S-16 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5, at S-17 (June 4, 2007); Registration Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am.1), at 18 (Mar. 15, 2006). (b) The depositor expects that the originator of each of the loans will have applied, consistent with applicable federal and state laws and regulations, underwriting procedures intended to evaluate the borrowers credit standing and repayment ability and/or the value and adequacy of the related property as collateral.

Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 30 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at 30 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at 30 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5, at 30 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at 30 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 39 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 28 (Dec. 29, 2005); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am.3), at 225 (Mar. 31, 2006);

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Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 225 (Dec. 7, 2005). (c) As of the Cut-off Date, DLJMC acquired approximately 49.23% of the mortgage loans (by Cut-off Date Principal Balance) through its whole-loan flow acquisition channel from originators that DLJMC has determined met its qualified correspondent requirements. Such standards require that the following conditions be satisfied: (i) the related mortgage loans were originated in accordance with underwriting guidelines designated by DLJMC (Designated Guidelines) or guidelines that do not vary materially from such Designated Guidelines; (ii) such mortgage loans were in fact underwritten as described in clause (i) above and were acquired by DLJMC within 270 days after the related origination dates (iv) DLJMC employed, at the time such mortgage loans were acquired by DLJMC, certain quality assurance procedures designed to ensure that the applicable qualified correspondent from which it purchased the related mortgage loans properly applied the underwriting criteria designated by DLJMC.

The above misstatements were contained in the following Offering Document: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at S-30 (Oct. 30, 2006). 265. The statements quoted above were false because they represented that the

originators applied underwriting guidelines and quality control measures to assess the value of the mortgaged properties, evaluate the adequacy of such properties as collateral for the mortgage loans, and assess the applicants abilities to repay their mortgage loans, when in fact the originators had actually abandoned these standards so that they could increase the volume of loan origination and the resulting fees that they earned. B. 266. DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS REGARDING UNDERWRITING EXCEPTIONS The Prospectus Supplements disseminated by Defendants in the course of selling

the Certificates, and therefore the Registration Statements of which those Prospectus

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Supplements formed a part, contained the following misleading statements, among others, using identical or substantially similar language, regarding the circumstances under which the originators granted underwriting exceptions for loans underlying the Certificates: (a) In addition, certain exceptions to the underwriting standards described herein may be made in the event that compensating factors are demonstrated by a prospective mortgagor.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 19 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-36 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-36 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-36 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-36 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 39 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 29 (Dec. 29, 2005); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2) (Aug. 10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S3/A, Am. 3) (Mar. 31, 2006); Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am. 1) (Dec. 7, 2005). (b) On a case-by-case basis, the applicable Originator may determine that, based upon compensating factors, a loan applicant, not strictly qualifying under one of the Risk Categories described below, warrants an exception to the requirements set forth in the Underwriting Guidelines. Compensating factors may include, but are not limited to, loan-to-value ratio, debt-to-income ratio, good credit history, stable employment history, length at current employment and time in residence at the applicants current address.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 100

49 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 70-72 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 37 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 34 (June 4, 2007); Registration Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1) (Mar. 15, 2006). 267. The above statements of material facts were untrue when made because they

failed to disclose that, in order to generate increased loan volume for securitizations, and in contravention of Defendants and the third party originators underwriting guidelines, Defendants and the third party originators allowed non-qualifying borrowers to be approved for loans under exceptions to their underwriting standards, even though there were no compensating factors that could possibly justify such an exception. C. 268. DEFENDANTS MADE UNTRUE STATEMENTS AND OMISSIONS REGARDING LOANTO-VALUE RATIOS AND APPRAISALS The Prospectus Supplements disseminated by Defendants in the course of selling

the Certificates, and therefore the Registration Statements of which those Prospectus Supplements formed a part, contained the following misleading statements, among others, regarding loan-to-value ratios and appraisals of the properties securing the mortgage loans underlying the Certificates: (a) No Mortgage Loan had an LTV at origination in excess of 100.00%.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 26 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 25 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 28 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 29 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 20 (Oct. 30, 2006); Prospectus Supplement for 101

HEAT 2006-5 (Form 424B5), at S-29 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-29 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-29 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-29 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 31 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at S-20 (Dec. 29, 2005); Registration Statement (333-131465) filed by ABS Corp. (Form S-3/A, Am. 1), at 28 (Mar. 15, 2006). (b) The adequacy of the mortgaged property as security for repayment of the related mortgage loan will generally have been determined by an appraisal in accordance with pre established appraisal procedure guidelines for appraisals established by or acceptable to the originator. All appraisals conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation and must be on forms acceptable to Fannie Mae and/or Freddie Mac. Appraisers may be staff appraisers employed by the originator or independent appraisers selected in accordance with pre established appraisal procedure guidelines established by the originator. The appraisal procedure guidelines generally will have required the appraiser or an agent on its behalf to personally inspect the property and to verify whether the property was in good condition and that construction, if new, had been substantially completed. The appraisal generally will have been based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. Under some reduced documentation programs, the originator may rely on the original appraised value of the mortgaged property in connection with a refinance by an existing mortgagor.

The above misstatement, in identical or substantially similar language, was contained in the following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 32 (Oct. 30, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 41 (Feb. 1, 2007); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 72 (Dec. 1, 2006); Prospectus 102

Supplement for ABSC 2006-HE7 (Form 424B5), at 49-50 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 162 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 151 (June 4, 2007); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-37 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-37 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S37 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-37 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 41 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 30 (Dec. 29, 2005); Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am. 1), at 226 (Dec. 7, 2005); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am. 2), at 41 (Aug. 10, 2006); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3), at 226 (Mar. 31, 2006). 269. The above representations were materially false and misleading in that they

omitted to state that: (i) Defendants and the originators violated their stated appraisal standards and in many instances materially inflated the values of the underlying mortgaged properties used to collateralize the Certificates; (ii) the appraisers were not independent, and Defendants and the originators in fact exerted pressure on appraisers to come back with pre-determined, inflated and false appraisal values; (iii) the inflated appraisals obtained by Defendants and the originators did not conform to USPAP, Fannie Mae or Freddie Mac standards and were not based on market data analyses of comparable homes in the area or analyses of the cost of construction of a comparable home; and (iv) the forms of credit enhancement applicable to certain tranches of the Certificates were affected by the total value of the underlying properties, and thus were inaccurate as stated. Defendants omitted to disclose that they and the originators subordinated

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proper appraisals to the goal of originating and securitizing as many mortgage loans as they could. 270. All of the representations regarding LTV ratios, described above, were materially

false and misleading because the underlying appraisals used to determine the LTVs were improperly performed. The actual LTV ratios for numerous mortgage loans underlying the Certificates would have exceeded 100% if the underlying properties had been appraised by an independent appraiser according to USPAP standards as represented in the Offering Documents. D. 271. DEFENDANTS MATERIALLY MISREPRESENTED THE ACCURACY OF THE CREDIT RATINGS ASSIGNED TO THE CERTIFICATES The Prospectus Supplements disseminated by Defendants in the course of selling

the Certificates, and therefore the Registration Statements of which those Prospectus Supplements formed a part, contained the following misleading statements using identical or substantially similar language, among others, touting the credit ratings assigned to the Certificates. It is a condition to the issuance of the certificates of each series offered hereby that at the time of issuance they shall have been rated in one of the four highest rating categories by the nationally recognized statistical rating agency or agencies specified in the related prospectus supplement. The above misstatements were contained in the following Offering Documents: Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 136 (Oct. 30, 2006); Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at S-185 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at S-151 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at S-105 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at S-103 (June 4, 2007); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at 136 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at 136 (Aug. 1,

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2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at 136 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at 136 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 147 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at 127 (Dec. 29, 2005); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am. 3), at 340 (Mar. 31, 2006); Registration Statement (333135481) filed by CSFB Mortgage (Form S-3/A, Am.2), at 148 (Aug. 10, 2006); Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 326 (Dec. 7, 2005). 272. By touting the ratings of the Certificates, and in making the above statements in

the Offering Documents, Defendants represented that they believed that the information provided to the rating agencies to support these ratings accurately reflected the guidelines and practices of Defendants CSFC and DLJ, as well as those of the third party originators, and the specific qualities of the underlying loans. These representations were false because Defendants did not disclose to the rating agencies the extent of their and the third party originators improper underwriting and appraisals and that Defendants otherwise gamed the rating agencies to ensure that they obtained the highest ratings even when those ratings were not warranted. The falsity of these representations is further evidenced by the rapid downgrades of all of the Certificates within a few years of issuance. E. 273. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE CREDIT ENHANCEMENTS APPLICABLE TO THE CERTIFICATES The Prospectus Supplements disseminated by Defendants in the course of

selling the Certificates, and therefore the Registration Statements of which those Prospectus Supplements formed a part, contained the following misleading statements, among others, in identical or substantially similar language, regarding credit enhancements.

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Subordination The rights of the holders of the Subordinate Certificates to receive distributions will be subordinated, to the extent described in this prospectus supplement, to the rights of the holders of the Class A Certificates. In addition, the rights of the holders of the Mezzanine Certificates with a lower payment priority will be subordinated to the rights of holders of the Mezzanine Certificates with a higher payment priority, in each case, to the extent described in this prospectus supplement. Subordination is intended to enhance the likelihood of regular distributions of interest and principal on the more senior certificates and to afford those certificates protection against realized losses on the mortgage loans. *** Overcollateralization As of the closing date, the aggregate principal balance of the mortgage loans as of the cut-off date will exceed the aggregate principal balance of the LIBOR Certificates and the Class P Certificates in an amount equal to approximately 2.00% of the aggregate principal balance of the mortgage loans as of the cut-off date. This feature is referred to as overcollateralization. The mortgage loans owned by the trust bear interest each month in an amount that in the aggregate is expected to exceed the amount needed to pay monthly interest on the LIBOR Certificates and to pay the fees and expenses of the trust. This excess interest will be applied, if necessary, to pay principal on the LIBOR Certificates in order to maintain the required level of overcollateralization. The required level of overcollateralization may decrease over time. *** Excess Interest The mortgage loans owned by the trust bear interest each month in an amount that in the aggregate is expected to exceed the amount needed to pay monthly interest on the LIBOR Certificates and to pay the fees and expenses of the trust. The excess interest from the mortgage loans each month will be available to maintain overcollateralization at required levels and to absorb realized losses on the mortgage loans as described in the pooling and servicing agreement. *** Allocation of Losses If on any distribution date there is not sufficient excess interest or overcollateralization to absorb realized losses on the mortgage

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loans as described under "Description of the Certificates Overcollateralization Provisions" in this prospectus supplement, then realized losses on the mortgage loans will be allocated to the Mezzanine Certificates. If realized losses on the mortgage loans are allocated to the Mezzanine Certificates, they will be allocated first to the class of Mezzanine Certificates with the highest numerical designation until the certificate principal balance thereof has been reduced to zero and then to the class of Mezzanine Certificates with the next highest numerical designation. The pooling and servicing agreement does not permit the allocation of realized losses on the mortgage loans to the Class A Certificates or Class P Certificates; however, investors in Class A Certificates should realize that under certain loss scenarios there will not be enough principal and interest on the mortgage loans on a distribution date to pay the Class A Certificates all interest and principal amounts to which those certificates are then entitled. Any realized losses allocated to a class of Mezzanine Certificates will generally cause a permanent reduction to its certificate principal balance. However, the amount of any realized losses allocated to any or all of the Mezzanine Certificates may be reimbursed to the holders of these certificates according to the priorities set forth under "Description of the Certificates-Overcollateralization Provisions" and "--the Swap Agreement" in this prospectus supplement. *** Swap Agreement In certain circumstances, payments made to the supplemental interest trust under the swap agreement may be available to cover certain realized losses on the mortgage loans. The above misstatements, in identical or substantially similar language, were contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 12-13 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 12-13 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 14-15 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 15-16 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 51 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-11 S-12 (July 6, 2006); Prospectus

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Supplement for HEAT 2006-6 (Form 424B5), at S-11 S-12 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-11 S-12 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-11 S-12 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at S-11 S-12 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at S-6 S-7 (Dec. 29, 2005). 274. The above statements were materially false and misleading when made because

they failed to disclose that because the loan originators systematically ignored their underwriting standards and abandoned their property appraisal standards, borrowers would not be able to repay their loans, foreclosure sales would not recoup the full value of the loans, and the aggregate expected principal payments would not, nor could they be expected to, exceed the aggregate class principal of the Certificates. As such, the Certificates were not protected with the level of credit enhancement and overcollateralization represented to investors in the Prospectus Supplements. F. 275. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING OWNER-OCCUPANCY STATISTICS Each of the Prospectus Supplements disseminated by Defendants in the course of

selling the Certificates, and therefore the Registration Statements of which those Prospectus Supplements formed a part, contained tables substantially similar to that below, purporting to provide data on the owner-occupancy rates of mortgage loans underlying the Certificates. The figures contained in these tables were materially false and misleading, however, because Defendants systematically overstated the owner-occupancy rates. 276. For example, the following table appears in the Prospectus Supplement for HEMT

2005-5 (Form 424B5), at S-22 (Dec. 29, 2005), which was purchased in the offering by ABP:

108

277.

But an analysis by Allstate of this same Certificate found that the true non-owner-

occupancy rate for the loans included in this particular mortgage pool was 12.84%, not 10.02% as represented above. See Section VI, supra. 278. FHFA also analyzed the owner-occupancy statistics for several Certificates that it

purchased and presented its results in tabular form (excerpted below).

Transaction

Supporting Loan Group

Reported Percentage of Non-Owner Occupied Properties

ABSC 2006-HE6 ABSC 2006-HE7 ABSC 2007-HE1 ABSC 2007-HE2 HEAT 2006-5 HEAT 2006-6 HEAT 2006-7 HEAT 2006-8 HEAT 2007-1

Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1 Group 1

17.58 13.62 6.26 3.77 13.81 6.61 5.88 5.25 5.99

Percentage of Properties Reported as Owner-Occupied With Strong Indications of NonOwner-occupancy 10.97 11.52 9.72 10.90 9.28 11.41 13.85 10.98 13.54

Actual Percentage of Non-Owner Occupied Properties

Prospectus Understatement of Non-Owner Occupied Properties

26.62 23.57 15.38 14.25 21.80 17.26 18.92 15.65 18.72

9.04 9.95 9.12 10.49 8.00 10.65 13.04 10.40 12.73

The above misstatements were contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 37 (Dec. 1, 2006); Prospectus Supplement 109

for ABSC 2006-HE7 (Form 424B5), at 35 (Dec. 1, 2006); Prospectus Supplement for ABSC 2007-HE1 (Form 424B5), at 110 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 106 (June 4, 2007); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-24 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-24 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-24 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-24 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 25 (Feb. 1, 2007). 279. Although ABP purchased Group 2 securities, it is likely that those securities had

owner-occupancy discrepancies as well. 280. The other Offering Document represented similar information regarding owner-

occupancy statistics. See Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 16 (Oct. 30, 2006). 281. The results of these loan-level reviews establish that, contrary to Defendants

representations, a far lower percentage of borrowers did, in fact, occupy the mortgaged properties than was represented to investors such as Plaintiff ABP in the Offering Documents. G. 282. DEFENDANTS MADE UNTRUE STATEMENTS REGARDING THE TRANSFER OF TITLE TO THE ISSUING TRUSTS Defendants stated in each of the Offering Documents, using identical or

substantially similar language, that: On the Closing Date, the Depositor will transfer to the Trust all of its right, title and interest in and to each Mortgage Loan, the related mortgage note, mortgage, assignment of mortgage in recordable form to the Trustee and other related documents (collectively, the Mortgage Loan Documents), including all scheduled payments with respect to each such Mortgage Loan due after the Cut-off Date.

110

The above misstatements were contained in the following Offering Documents: Prospectus Supplement for ABSC 2006-HE6 (Form 424B5), at 113 (Dec. 1, 2006); Prospectus Supplement for ABSC 2006-HE7 (Form 424B5), at 85 (Dec. 1, 2006); Prospectus Supplement for ABS 2007-HE1 (Form 424B5), at 70 (Feb. 6, 2007); Prospectus Supplement for ABSC 2007-HE2 (Form 424B5), at 68 (June 4, 2007); Prospectus Supplement for CSAB 2006-3 (Form 424B5), at 44 (Oct. 30, 2006); Prospectus Supplement for HEAT 2006-5 (Form 424B5), at S-34 (July 6, 2006); Prospectus Supplement for HEAT 2006-6 (Form 424B5), at S-34 (Aug. 1, 2006); Prospectus Supplement for HEAT 2006-7 (Form 424B5), at S-34 (Oct. 3, 2006); Prospectus Supplement for HEAT 2006-8 (Form 424B5), at S-34 (Dec. 4, 2006); Prospectus Supplement for HEAT 2007-1 (Form 424B5), at 39 (Feb. 1, 2007); Prospectus Supplement for HEMT 2005-5 (Form 424B5), at S-25 (Dec. 29, 2005); Registration Statement (333-130884) filed by CSFB Mortgage (Form S-3/A, Am.3), at 246 (Mar. 31, 2006); Registration Statement (333-135481) filed by CSFB Mortgage (Form S-3/A, Am.2), at 60 (Aug. 10, 2006); Registration Statement (333-127872) filed by CSFB Mortgage (Form S-3/A, Am.1), at 242 (Dec. 7, 2005). 283. These representations were false because Defendants routinely failed to

physically deliver the original promissory notes and security instruments for the mortgage loans to the Issuing Trusts, as required by applicable state laws and the PSAs. These representations were also false because Defendants routinely failed to execute valid endorsements of the documents at the time of the purported transfer, as is also required by applicable state laws and the PSAs. The Issuing Trusts therefore did not possess good title to many of the mortgage loans and lacked legal authority to enforce many of the mortgage loans against the borrowers in the event of default.

111

XII.

DEFENDANTS KNEW THAT THE OFFERING DOCUMENTS CONTAINED MATERIAL MISSTATEMENTS AND OMISSIONS 284. The allegations below are made in support of Plaintiffs common-law fraud,

fraudulent inducement and aiding and abetting claims, and not in support of its negligent misrepresentation claim, which is based solely on negligence. 285. As set forth above, at all relevant times, Defendants knew or were reckless in not

knowing that the Offering Documents contained material misstatements and omissions. Defendants knowledge or recklessness is evidenced by, among other things, the following: Some of the defective loans underlying the Certificates purchased by Plaintiff were originated by the Credit Suisse entities CSFC and DLJ specifically for the purpose of securitization as part of Credit Suisses vertically integrated RMBS operation. See 82-91, supra. The limited due diligence that Defendants did perform on the mortgage loans being pooled for securitization demonstrated that there were significant and extensive defects in the mortgage loans. Defendants commissioned due diligence reports from various external parties which showed that a significant proportion of the sampled loans analyzed had defects, including breaches of the Originators underwriting guidelines and improper appraisals. Despite this knowledge, Defendants waived the breaches and allowed large numbers of these defective mortgages to be included in the mortgage pools used to collateralize the Certificates sold to Plaintiff. See 100-101, supra. Defendants required third-party originators to compensate them for defective or defaulting loans without remitting their recoveries to the Issuing Trusts or providing notice to the RMBS investors who owned the loans. See 105-110, supra. Defendants vertically integrated securitization operations included servicing activities that kept them apprised of the true state of the securitized mortgages, including default rates and property values. Defendants did not provide accurate information regarding these matters to investors. See 111-117, supra. Multiple independent reviews of the loans underlying Defendants RMBS offerings have revealed that Defendants consistently made material misstatements of owner-occupancy rates and LTV ratios in their offering documents. See 209-212, 225-228, supra.

112

Defendants knew that the mortgages they were acquiring from the various originators as quickly as possible and packaging into the Certificates sold to investors such as Plaintiff were not worthy of their high credit ratings. The ratings of the Certificates, which were all rated Aaa at the time Plaintiff purchased them, have declined substantially to their current noninvestment grade and/or junk ratings. See 296-307, supra. A report prepared by Credit Suisses own analysts, including members of its Mortgage-Backed Securities Team, revealed that Defendants were aware of the widespread collapse of lending and underwriting standards by originators of the loans that were pooled into securitizations like those purchased by ABP. See 119-124, supra. Defendants knew that the mortgages underlying the Certificates were likely to default, as evidenced by the high percentage of loans that are currently in foreclosure as well as the percentage of the loans underlying the Certificates that are currently delinquent by more than 90 days. See 308, infra.

XIII.

PLAINTIFF JUSTIFIABLY RELIED ON DEFENDANTS MISREPRESENTATIONS TO ITS DETERIMENT 286. Plaintiff, through its agents, purchased senior classes of mortgage-backed

securities (i.e., those rated AAA/Aaa by the rating agencies S&P and Moodys). The Certificates were purchased to generate income and total return through safe investments. The securities were purchased with the expectation that the investments could be and indeed some were purchased and sold on the secondary market. 287. In making the investments, Plaintiff and/or its agents relied upon Defendants

representations and assurances regarding the quality of the mortgage collateral underlying the Certificates, including the quality of the underwriting processes related to the underlying mortgage loans. Plaintiff and/or its agents received, reviewed, and relied upon the Offering Documents, which purported to describe in detail the mortgage loans underlying each offering. Offering Documents containing the representations outlined above (nearly identical, or materially similar counterparts thereto) were obtained, reviewed, and relied upon before any purchase was made. 113

288.

In purchasing the Certificates, Plaintiff and/or its agents justifiably relied on

Defendants false representations and omissions of material fact detailed above, including the misstatements and omissions in the Offering Documents. These representations materially

altered the total mix of information upon which Plaintiff and/or its agents made their purchasing decisions. 289. But for the misrepresentations and omissions in the Offering Documents, Plaintiff

and its agents would not have purchased or acquired the Certificates as they ultimately did, because those representations and omissions were material to their decisions to acquire the Certificates, as described above. 290. As discussed supra, Plaintiff is a conservative institutional investor that relied on

Defendants representations in the Offering Documents that the Certificates purchased by Plaintiff were safe, Aaa-rated securities. Because Plaintiff did not have access to the loan files, appraisals, or other supporting documentation for the loans underlying the Certificates, Plaintiff had no reasonable means or ability to conduct its own due diligence regarding the quality of the mortgage pools. As such, Plaintiff and its agents were forced to and did rely on the

representations made by Defendants in the Offering Documents, and it was because of those representations that Plaintiff purchased the Certificates at issue in this Complaint. 291. In its capacity as underwriter of these offerings, Credit Suisse Securities had an

obligation to conduct due diligence regarding the accuracy and completeness of the Offering Documents prior to their dissemination to investors and prior to consummation of the offerings. In connection with that due diligence process, Credit Suisse Securities had access to numerous internal and external sources of information that should have alerted it to the systematic and widespread abandonment of the underwriting guidelines and stated appraisal methods of CSFC,

114

DLJ, and the third-party originators who sold loans that were included in Credit Suisse securitizations. 292. Credit Suisse Securities was thus supposed to play a gatekeeper role for public

investors such as Plaintiff, who did not have access to non-public information through which to test the assertions in the Offering Documents. However, as set forth above, Credit Suisse Securities failed to discharge its obligations. As concluded in a March 2008 Policy Statement on Financial Market Developments by the Presidents Working Group on Financial Markets, [a]lthough market participants had economic incentives to conduct due diligence the steps they took were insufficient. 293. As discussed in 100-101, supra, Credit Suisses due diligence vendor Clayton

informed Credit Suisse that a substantial number of the loans in its securitization pools did not meet underwriting guidelines, and did not possess compensating factors to justify granting exceptions to the guidelines. Credit Suisse largely ignored these findings, waived a third of these troubled pools back into the securitization pools and sold them to investors such as Plaintiff ABP. In breach of its obligations, the Underwriter Defendant omitted to disclose this

information and proceeded to market the Certificates to investors such as Plaintiff. XIV. PLAINTIFF HAS SUFFERED LOSSES AS A RESULT OF ITS PURCHASES OF THE CERTIFICATES 294. The false and misleading statements of material fact and omissions of material

facts in the Offering Documents directly caused Plaintiff damage, because the Certificates were in fact far riskier than Defendants had described them to be. As set forth below, the loans underlying the Certificates experienced default and delinquency at very high rates due to Defendants abandonment of their purported underwriting guidelines. The resulting downgrades to the Certificates ratings have made them unmarketable at anywhere near the prices Plaintiff

115

paid, thus confirming that Plaintiff paid far more for the Certificates than the value they actually received. 295. As set forth below, Plaintiff has incurred substantial losses in market value due to

the poor quality of the collateral underlying the Certificates. The income and principal payments Plaintiff received have been lower than Plaintiff expected. Because of the declining collateral base, it is increasingly likely that Plaintiff will not obtain the full payments expected under the waterfall provisions of the securitizations. This is reflected in the far diminished market value for these securities, which, again, is a strong indicator that the true value of the Certificates was far less than what Plaintiff paid. 296. Plaintiff purchased Certificates issued by Home Equity Mortgage Trust 2005-5 on

December 29, 2005, in the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded twice and are currently rated Caa1. At the time of filing of this complaint, the Certificates were trading at just approximately 33% of par. 297. Plaintiff purchased Certificates issued by HEAT 2006-5 on July 5, 2006, in the

offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded once and are currently rated Aa3. At the time of filing of this complaint, the Certificates were trading at just approximately 97% of par. 298. Plaintiff purchased Certificates issued by HEAT 2006-6 on August 1, 2006, in the

offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded twice and are currently rated Baa3. At the time of filing of this complaint, the Certificates were trading at just approximately 88% of par. 299. Plaintiff purchased Certificates issued by HEAT 2006-7 on October 3, 2006, in

the offering, when they were rated as Aaa by Moodys, but the Certificates have since been

116

downgraded four times and are currently rated B1. At the time of filing of this complaint, the Certificates were trading at just approximately 80% of par. 300. Plaintiff purchased Certificates issued by CSAB 2006-3, on October 31, 2006, in

the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded four times and are currently rated Ca. At the time of filing of this complaint, the Certificates were trading at just approximately 37% of par. 301. Plaintiff purchased Certificates issued by ABSC 2006-HE6 on November 30,

2006, in the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded and are currently rated Ba1. At the time of filing of this complaint, the Certificates were trading at just approximately 97% of par. 302. Plaintiff purchased Certificates issued by ABSC 2006-HE7 on November 30,

2006, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded twice and are currently rated Caa2. At the time of filing of this complaint, the Certificates were trading at just approximately 58% of par. 303. Plaintiff purchased Certificates issued by HEAT 2006-8 on December 1, 2006, in

the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded four times and are currently rated B2. At the time of filing of this complaint, the Certificates were trading at just approximately 77% of par. 304. Plaintiff purchased Certificates issued by HEAT 2007-1 on February 1, 2007, in

the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded three times and are currently rated A3. At the time of filing of this complaint, the Certificates were trading at just approximately 96% of par.

117

305.

Plaintiff purchased Certificates issued by ABSC 2007-HE1 on February 6, 2007,

in the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded twice and are currently rated Caa3. At the time of filing of this complaint, the Certificates were trading at just approximately 76% of par. 306. Plaintiff purchased Certificates issued by ABSC 2007-HE2 on May 31, 2007, in

the offering, when they were rated as Aaa by Moodys, but the Certificates have since been downgraded twice and are currently rated B3. At the time of filing of this complaint, the Certificates were trading at just approximately 69% of par. 307. The chart below shows the complete downgrade histories for all of the

Certificates purchased by Plaintiff. Issuing Trust S&P Rating / Effective Date AAA 12/4/06 BBB AAA ABSC 2006-HE7 A3 A CCC AAA ABSC 2007-HE1 A3 AA CCC AAA ABSC 2007-HE2 A2 A+ ACCC AAA CCC CSAB 2006-3 A1B2 7/18/11 12/4/06 3/2/10 8/11/11 3/2/07 3/26/10 7/18/11 6/4/07 8/4/09 3/2/10 8/11/11 11/2/06 8/14/09 Aaa Aa3 Baa2 B3 Ca 10/30/06 9/22/08 2/11/09 8/12/09 11/19/10 Moodys Rating / Effective Date Aaa 11/30/06 Ba3 Ba1 Aaa Ba3 Caa2 Aaa B3 Caa3 Aaa Ba3 B3 3/13/09 7/12/10 11/30/06 3/13/09 7/12/10 2/6/07 3/13/09 7/12/10 6/8/07 3/13/09 7/12/10

ABSC 2006-HE6 A3

118

Issuing Trust HEAT 2006-5 2A2

S&P Rating / Effective Date AAA 7/17/06 AAA 9/6/06 9/25/09 3/2/10 10/21/11 10/9/06 9/2/08 10/21/11

Moodys Rating / Effective Date Aaa 7/5/06 Aa3 Aaa Aa1 Baa3 Aaa Aa2 A1 Baa3 B1 3/19/09 8/1/06 4/21/08 3/19/09 10/13/06 4/21/08 10/28/08 3/19/09 5/5/10 12/19/06 4/21/08 10/28/08 3/19/09 5/5/10 2/1/07 4/21/08 3/19/09 5/5/10 12/29/05 10/20/08 3/2/09

HEAT 2006-6 2A2

AA A+ BB+ AAA A

HEAT 2006-7 2A2

B+

AAA AA HEAT 2006-8 2A2 BBB CCC AAA BB+ HEAT 2007-1 2A1

12/12/06 12/19/08 10/6/09 7/18/11 2/23/07 7/18/11

Aaa Aa3 Baa1 Ba1 B2 Aaa AA2 A1 A3

AAA HEMT 2005-5 A1A

12/30/05

Aaa Baa2 Caa1

308.

As a result of the multiple and material misrepresentations contained in the

Offering Documents, Plaintiff has suffered losses on its purchases of the Certificates. As of the filing of this Complaint, the mortgage loans in the pools held by the Issuing Trusts and underlying Plaintiffs Certificates have suffered escalating default rates and mounting foreclosures.

119

Certificates Purchased by ABP

ABSC 2006-HE6 A3 ABSC 2006-HE7 A3 ABSC 2007-HE1 A3 ABSC 2007-HE2 A2 CSAB 2006-3 A1B2 HEAT 2006-5 2A2 HEAT 2006-6 2A2 HEAT 2006-7 2A2 HEAT 2006-8 2A2 HEAT 2007-1 2A1 HEMT 2005-5 A1A

Percentage of Loans Underlying the Certificates Delinquent by More Than 90 Days 27.96% 30.70% 25.09% 30.53% 42.14% 39.83% 41.00% 39.03% 42.82% 41.55% 7.65%

Percentage of Loans Underlying the Certificates in Foreclosure 12.74% 16.48% 11.91% 14.86% 28.49% 22.06% 20.39% 20.80% 24.15% 21.18% .63%

CAUSES OF ACTION FIRST CAUSE OF ACTION Common Law Fraud (Against the Corporate Defendants) 309. herein. 310. 311. This claim is brought against the Corporate Defendants. The Corporate Defendants promoted and sold the Certificates purchased by Plaintiff realleges each and every allegation contained above as if fully set forth

Plaintiff pursuant to the defective Offering Documents. The Offering Documents contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading, and concealed and failed to disclose material facts. 312. Each of the Corporate Defendants knew their representations and omissions were

false and/or misleading at the time they were made. Each of the Corporate Defendants made the misleading statements with an intent to defraud ABP.

120

313.

Each of the Corporate Defendants knew that their representations and omissions

were false and/or misleading at the time they were made or at the very least, recklessly made such representations and omissions without knowledge of their truth or falsity. 314. Each of the Corporate Defendants made the misleading statements and omissions

with an intent to defraud Plaintiff and to induce Plaintiff into purchasing the Certificates. Furthermore, these statements related to these Defendants own acts and omissions. 315. The Corporate Defendants knew or recklessly disregarded that investors such as

Plaintiff ABP were relying on their expertise, and they encouraged such reliance through the Offering Documents and their public representations. These Defendants knew or recklessly disregarded that investors such as ABP would rely upon their representations in connection their decision to purchase the Certificates. These Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 316. ABP reasonably, justifiably and foreseeably relied on the Corporate Defendants

false representations and misleading omissions. 317. It was only by making such representations that the Corporate Defendants were

able to induce ABP to buy the Certificates. ABP would not have purchased or otherwise acquired the Certificates but for these Defendants fraudulent representations and omissions about the quality of the Certificates. 318. Had ABP known the true facts regarding the loans underlying the Certificates,

including the Corporate Defendants and the Originators abandonment of their underwriting practices, the Corporate Defendants and Originators improper appraisal methods, the inaccuracy of the ratings assigned by the rating agencies, and the failure to convey to the Issuing

121

Trusts legal title to the underlying mortgages, Plaintiff would not have purchased the Certificates. 319. As a result of the Corporate Defendants false and misleading statements and

omissions, Plaintiff suffered damages in connection with its purchase of the Certificates. 320. Because the Corporate Defendants committed these acts and omissions

maliciously, wantonly and oppressively, and because the consequences of these acts knowingly affected the general public, including but not limited to all persons with interests in the RMBS, ABP is entitled to recover punitive damages. 321. In the alternative, ABP hereby demands rescission and makes any necessary

tender of Certificates. SECOND CAUSE OF ACTION Fraudulent Inducement (Against the Corporate Defendants) 322. herein. 323. 324. This is a claim for fraudulent inducement against the Corporate Defendants. As alleged above, in the Offering Documents and in their public statements, the Plaintiff realleges each and every allegation contained above as if fully set forth

Corporate Defendants made fraudulent and false statements of material fact, and omitted material facts necessary in order to make their statements, in light of the circumstances under which the statements were made, not misleading. 325. The Issuing and Underwriter Defendants knew at the time they sold and marketed

each of the Certificates that the foregoing statements were false, or, at the very least, made recklessly, without any belief in the truth of the statements.

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326.

The Corporate Defendants made these materially misleading statements and

omissions for the purpose of inducing Plaintiff to purchase the Certificates. Furthermore, these statements related to these Defendants own acts and omissions. 327. The Corporate Defendants knew or recklessly disregarded that investors such as

ABP were relying on their expertise, and they encouraged such reliance through the Offering Documents and their public representations. These Defendants knew or recklessly disregarded that investors such as ABP would rely upon their representations in connection with their decision to purchase the Certificates. These Defendants were in a position of unique and superior knowledge regarding the true facts concerning the foregoing material misrepresentations and omissions. 328. It was only by making such representations that the Corporate Defendants were

able to induce Plaintiff to buy the Certificates. Plaintiff would not have purchased or otherwise acquired the Certificates but for the Corporate Defendants fraudulent representations and omissions about the quality of the Certificates. 329. Plaintiff justifiably, reasonably and foreseeably relied on the Corporate

Defendants representations and false statements regarding the quality of the Certificates. 330. By virtue of the Corporate and Underwriter Defendants false and misleading

statements and omissions, as alleged herein, Plaintiff has suffered substantial damages and is also entitled to rescission or rescissory damages. THIRD CAUSE OF ACTION Aiding and Abetting Fraud (Against All Defendants) 331. ABP repeats and realleges each and every allegation contained above as if fully

set forth herein.

123

332.

This is a claim against the above-named aiding and abetting Defendants (the

Aiding and Abetting Defendants) for aiding and abetting the fraudulent and reckless misrepresentations by all Defendants. Each of these Defendants aided and abetted the fraud committed by all of the other Defendants 333. As alleged in detail above, the Corporate Defendants knowingly promoted and

sold Certificates to ABP pursuant to materially misleading Offering Documents, thereby damaging ABP. The Aiding and Abetting Defendants knew of the fraud perpetrated on ABP by the Corporate Defendants; each Corporate Defendant aiding and abetting all other Corporate Defendants. The Aiding and Abetting Defendants directed, supervised and otherwise knew of the abandonment of underwriting practices and the utilization of improper appraisal methods; the inaccuracy of the ratings assigned by the rating agencies; and the failure to convey to the Issuing Trusts legal title to the underlying mortgages. 334. The Aiding and Abetting Defendants provided the Corporate Defendants with The Aiding and Abetting Defendants

substantial assistance in perpetrating the fraud.

participated in the violation of mortgage loan underwriting and appraisal standards; made false public statements about mortgage loan underwriting and appraisal standards; provided false information about the mortgage loans underlying the Certificates to the rating agencies; provided false information for use in the Offering Documents; and/or participated in the failure to properly endorse and deliver the mortgage notes and security documents to the Issuing Trusts. 335. It was foreseeable to the Aiding and Abetting Defendants at the time they actively

assisted in the commission of the fraud that ABP would be harmed as a result of their assistance.

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336.

As a direct and natural result of the fraud committed by the Corporate Defendants,

and the knowing and active participation by the Aiding and Abetting Defendants, Plaintiff has suffered substantial damages. FOURTH CAUSE OF ACTION Negligent Misrepresentation (Against All Defendants) 337. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein, except any allegations that the Defendants made any untrue statements and omissions intentionally or recklessly. For the purposes of this Count, ABP expressly disclaims any claim of fraud or intentional misconduct. 338. Defendants originated or acquired all of the underlying mortgage loans and

underwrote and sponsored the securitizations at issue. Based on due diligence they conducted on the loan pools and the Originators, they had unique and special knowledge about underwriting defects in the loans in the offerings. economics of each securitization. 339. As the sponsors, underwriters and depositors of the Certificates, Defendants were Defendants were uniquely situated to evaluate the

uniquely situated to explain the details, attributes, and conditions of each security. Defendants made the misrepresentations described above to induce ABP to purchase the Certificates. 340. ABP did not possess the loan files for the mortgage loans underlying its

Certificates and thus it could not conduct a loan-level analysis of the underwriting quality or servicing practices for the mortgage loans. 341. Defendants were aware that Plaintiff relied on Defendants unique and special

knowledge and experience and depended upon Defendants for accurate and truthful information regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the Certificates at issue in this action. Defendants also knew that the facts 125

regarding whether or not the Originators of the underlying loans complied with their stated underwriting standards and appraisal methods were exclusively within Defendants knowledge and control. 342. Over the course of almost two years, when making millions of dollars in

investments, ABP relied on the Defendants unique and special knowledge regarding the quality of the underlying mortgage loans and their underwriting when determining whether to invest in the Certificates. This longstanding relationship, coupled with the Defendants unique and special knowledge about the underlying loans, created a special relationship of trust, confidence, and dependence between the Defendants and ABP. 343. At the time it made these misrepresentations, Defendants knew, or at a minimum

were negligent in not knowing, that these statements were false, misleading, and incorrect. Such information was known to Defendants but not known to ABP, and Defendants knew that ABP was acting in reliance on mistaken information. 344. Based on their expertise, superior knowledge, and relationship with ABP,

Defendants had a duty to provide ABP with complete, accurate, and timely information regarding the underwriting standards and appraisal methods used. Defendants breached their duty to provide such information to ABP. 345. ABP reasonably relied on the information Defendants did provide which

Defendants undertook no attempt to correct. Without these material misrepresentations, ABP would not have bought the Certificates. 346. ABP has suffered substantial damages as a result of Defendants

misrepresentations. PRAYER FOR RELIEF WHEREFORE, ABP prays for relief and judgment, as follows: 126